Mountain State Business Index: Flood could push state back into recession

The Mountain State Business Index increased 0.1 percent in July and slight revisions to several of the index’s underlying data sources reveal a similar gain for June, as economy indicators point to the conclusion that the state’s recession likely ended during the second quarter.

Overall, the MSBI has increased in three of the last four months after data revisions were recorded, according to a press release from the West Virginia University College of Business and Economics. Economists at WVU added that two benchmark metrics from the MSBI that help determine whether West Virginia’s economy has reached a turning point indicate the state’s recession, in all likelihood, is over.

At the same time, the index still indicates West Virginia’s economy remains relatively weak and the economic fallout created by massive flooding in late June could cause conditions to weaken even further, possibly pushing the state back into recession for a time. Data releases over the next several months should begin to provide some basis for the magnitude of these economic impacts.

“We are gaining confidence that our recession is now over and that our economy is stabilizing based on recent readings of the Mountain State Business Index,” 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. “However, we still have very guarded optimism given uncertainty surrounding the recent flooding and persistent long-term trends that point to very slow growth moving forward.”

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 July 2016 MSBI reflects data that correspond to the month of June.

For July, four components made positive contributions to the overall index, with roughly equal contributions coming from stock prices for the state’s largest publicly-traded employers, natural gas and coal production, followed by a small improvement in initial unemployment insurance claims. Rate spreads on the three-month Treasury note (short term) rate and the 10-year Treasury note (long term) rate, and permits for new single-family homes weighed on the index accounted for the largest negative contributions to the MSBI, while a slight increase in the state trade-weighted dollar also pulled the index lower.

“The MSBI’s performance over the past several months indicates that the state’s economy emerged from recession, which offers at least some sense of cautious optimism going forward after such a difficult stretch from mid-2015 and much of 2016 to date. However, last month’s disastrous flooding events in portions of central and southern West Virginia will likely weigh on the state’s overall economic performance to some extent over the near term, as residents in these areas deal with the fallout associated with the widespread destruction of businesses, homes and infrastructure,” said Brian Lego, BBER research assistant professor.

“Even as the rebuilding process begins, the state’s overall growth potential remains limited as the coal industry continues to see significant struggles. Indeed, preliminary data indicate coal output from the state’s mines fell to incredibly low levels during the first half of 2016, as domestic use of thermal coal continued to fall and overcapacity in global steel markets led to further drop-offs in metallurgical coal demand. Without any appreciable improvements in domestic or export demand during the second half of the year, total coal tonnage from West Virginia mines in 2016 will likely fall to the lowest (non-strike influenced) level seen in many decades.”

“The other half of the state’s energy sector is not enduring anywhere near the same depth of problems as coal, but the skyrocketing growth in natural gas production has waned and a protracted period of extremely low prices has 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 or new wells has kept output rising since 2015, albeit inconsistently. The industry will see volatility persist into 2017 as production will be highly sensitive to small upward or downward moves in regional hub spot prices. Prospects remain strong over the long term as natural gas use rises, given the plans for numerous new, gas-fired power plants in the U.S. and the build-out of pipeline and LNG export terminal infrastructure. Also, the eventual addition of downstream processing facilities in the Mid-Atlantic states (potentially in West Virginia) offer cause for optimism in the state’s natural gas industry,” Lego said.

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