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Mountain State Business Index: West Virginia economy showing improved signs of recovery

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Economists at West Virginia University indicated that the state’s economy continues to demonstrate signs of recovery, as the Mountain State Business Index increased 0.2 percent in December and has posted gains of 0.2 percent or better in four of the last five months.

Additionally, the index posted a 2.3 percent increase in its six-month annualized rate of change. Both metrics mark the MSBI’s best performance in more than two years and provide further evidence that West Virginia’s economy as a whole is in the early stages of an emerging recovery, though some regions in West Virginia are still struggling from a deep economic downturn.

“We are happy to see a more positive outlook in the Mountain State Business Index over the past few months,” said John Deskins, director of the WVU Bureau of Business and Economic Research, which operates within the College of Business and Economics and produces the MSBI. “We are becoming much more confident that the state economy has stabilized; however, it remains uncertain as to when the state will see robust economic growth.”

The MSBI serves as an up-to-date gauge of West Virginia’s expected economic performance over the very near term by combining several leading economic indicators into a single index number that provides a convenient way to gauge the likelihood of swings in economic activity over the next four to six months. Signals of a coming contraction in the state’s economy can be identified if the index declines by at least two percent on an annualized basis over a six-month period and a consistent majority of the individual components also record statistically significant negative contributions during that same time period.

Seven economic indicators that were determined to lead expansions or contractions in the West Virginia economy were selected as inputs to the MSBI. Each indicator will make positive, negative or no contribution on a monthly basis to the overall index. The seven indicators are related to the following factors: building permits; unemployment insurance claims; the value of the U.S. dollar; stock prices related to West Virginia employers; interest rates; coal production; and natural gas output. The December 2016 MSBI reflects data that correspond to the month of November.

For December, six components made positive contributions to the overall index, with the largest improvements accounted for by coal production and building permits for new single-family homes. The trade-weighted dollar was the only negative contributor to the index in December.

“The MSBI’s performance over the past several months indicates that the state’s economy is likely in its earliest stages of recovery, which comes on the heels of a relatively sharp contraction in economic activity during much of 2015 and the first several months of 2016,” said Brian Lego, BBER research assistant professor. “This summer’s disastrous flooding has held back the state’s performance to some degree, as the destruction led to the loss of homes and businesses as well as extensive damage to infrastructure.

“Even as this rebuilding process begins, the state’s overall outlook remains mixed at best as West Virginia’s energy industries are expected to have measurably different growth prospects going forward. Data indicate statewide coal production has picked up considerably in the past six months as utilities have replenished inventories aggressively due to strong electricity demand in late summer and fall. In addition, metallurgical coal output has picked up amid rapidly-rising world prices, though a strong dollar and the high cost of production for mines operating in southern West Virginia has limited this impact for the time being. Even with the recent observed improvements in coal markets, coal tonnage mined from West Virginia operations likely totaled around 80 million short tons for the calendar year as a whole — the lowest level mined in several decades,” Lego said.

“Beyond the next several months, the state’s coal industry should continue to see some improvement in comparison to the deep struggles of late 2015 and early 2016, but the underlying trend of domestic utilities shifting toward other fuel sources (e.g. natural gas) will continue and effectively put a ceiling on any recovery in domestic coal use.”

Lego added that, even with a more favorable backdrop for international coal markets, the relatively high cost of reserves places a sizable portion of West Virginia coal at a competitive disadvantage when compared to other U.S. coal basins and overseas producers.

“Conditions have not been anywhere near as bad for the state’s natural gas industry, but the skyrocketing production growth of recent years has ended for now as low prices have led to layoffs, idled rigs, slashed capital investment plans and delays in new exploration activity for Marcellus and Utica Shale assets. Re-fracking of existing wells and some limited new well development has kept output from falling much thus far, but the industry’s performance has been fairly volatile. The industry’s up-and-down movement will likely persist into 2017 as production will remain sensitive to the price spread between the Henry Hub and the Appalachian Basin. Longer term, however, prospects for natural gas are overwhelmingly positive with several major pipeline projects under construction or in various phases of planning. These pipelines, along with LNG export capabilities from the East Coast, will enable regional gas production to satisfy rising global use of natural gas, while the eventual development of downstream processing facilities in neighboring states (and perhaps in West Virginia) offer additional cause for optimism in the state’s natural gas industry,” Lego said.

Technical documentation related to the Mountain State Business Index and other BBER publications are available for free download in PDF format at be.wvu.edu/bber. For further information about the WVU College of Business and Economics, follow B&E on Twitter at @wvucobe or visit business.wvu.edu.

-WVU-

pg/01/04/17

CONTACT: John Deskins, WVU College of Business and Economics

304.293.7876 or john.deskins@mail.wvu.edu

Follow @WVUToday on Twitter.