How West Virginia Got to Three Percent GDP Growth

 

 

By Reid Wilson

August 5, 2017 - President Trump is thrilled with West Virginia. At a boisterous campaign-style rally Thursday, Trump extolled the state’s strong first quarter economic growth — growth he said few expected.

“We had 3 percent growth in West Virginia. I wonder how that happened,” Trump told cheering supporters. “Three percent growth. West Virginia is leading the average. When was the last time we heard that?”

And indeed, after years of economic stagnation, West Virginia has strung together two positive quarters in a row: In the last quarter of 2016, the state’s economy expanded at a 1.9 percent annual rate. In the first quarter of 2017, the gross domestic product grew at a 3 percent annual rate, according to the Bureau of Economic Analysis.

At the same time, West Virginia’s unemployment rate has tumbled, from 6 percent last June to 4.6 percent this June, according to the Bureau of Labor Statistics. Only two states — Wyoming and Indiana — have experienced a faster decline in their unemployment rates.

Economists always warn about the dangers of reading too much into data from a single quarter or even consecutive quarters. And many say West Virginia still faces long-term challenges as the national and global economy evolves.

But three factors are working in West Virginia’s favor right now: a global infrastructure boom, the rising price of natural gas, and the legacy of a recession that hit the Mountaineer State harder than most.

While most industries struggled during the recession, the energy sector actually performed relatively well. States like West Virginia, Texas, North Dakota and Oklahoma experienced revenue booms as hydraulic fracturing boosted the supply of oil and natural gas. 

And while other industries bled jobs at a furious pace, West Virginia actually added mining jobs through even the depths of the recession: 35,300 West Virginians were employed in the mining and logging industry — the broad sector measured by the Bureau of Labor Statistics — at its recent peak, in December 2011.

But West Virginia’s silver lining soon turned to a dark cloud, and as global commodity prices — including coal — fell, so did the state’s critical mining sector. The number of mining and logging jobs in West Virginia fell by almost half, to 18,700 in September, before rebounding slightly to 22,000 today. 

In other words, while other states hit economic bottom in 2010 or 2011, West Virginia didn’t experience its own nadir until much later. Between 2012 and 2016, the state experienced an almost entirely flat economy, when accounting for inflation. 

“We have not seen growth in GDP for the last five years,” said John Deskins, director of the Bureau of Business and Economic Research at West Virginia University. “We’re starting from a small base. The fact that we haven’t grown in five years means the base is small.”

Any economic growth is going to be exaggerated, some economists said, because the state was starting from such a low point. The same growth in a state where the economy was already more robust would lead to a smaller overall GDP increase.

The global infrastructure boom has helped build on that base, especially in recent months. The average price of a ton of metallurgical coal — a product used in making steel — has more than doubled, from a low of $68.36 in the first quarter of 2016 to $152.96 today. At the same time, coal production in West Virginia has jumped 31 percent over just the last year, and coal employment is up 10 percent.

That means West Virginia is producing more of a product at a time the price is rising, and employing more people to do so — all ingredients necessary for a growing GDP.

“We’re seeing a more robust economy. We felt that our economy was probably going to bottom out in the 2015, 2016 period. It did,” said Steve Roberts, president of the West Virginia Chamber of Commerce.

It’s not just coal that’s helping boost West Virginia’s economy, Deskins said. The price of natural gas exports has also risen in recent months, from a low of $2.04 per thousand cubic feet in March 2016 to $3.57 per thousand cubic feet in May, according to the U.S. Energy Information Administration.

Those prices are rising as other countries turn from oil and coal to natural gas to fuel their electric grids. The U.S. exports about half its natural gas to Mexico, about a quarter to Canada and another quarter to other nations around the world.

And that helps West Virginia in two ways: First, the state produces about 5 percent of the nation’s natural gas, which means the higher price helps West Virginia more than most other states. Only eight other states — Texas, Alaska, Colorado, Louisiana, Ohio, Oklahoma, Pennsylvania and Wyoming — produce more natural gas than does West Virginia.

Second, higher prices for natural gas makes coal more attractive, and more competitive on the global market, Deskins said. Where lower natural gas prices once hurt the coal industry, higher prices are now helping.

“As energy has improved, West Virginia has improved,” Deskins said.

Other states heavily reliant on energy production also experienced strong economic growth in the first quarter, after years in which falling commodity prices took their toll on state budgets. 

Among the strongest-performing states in Trump’s first quarter as president: Texas, which grew at an annual rate of 3.9 percent; New Mexico, which notched a 2.8 percent GDP boost; and Alaska and North Dakota, which both came in with an annual growth rate of nearly 2 percent, after years of decline.

“This reflects a discernible bump in mining,” said Mark Muro, a senior fellow at the Brookings Institution’s Metropolitan Policy Project. “There has been a modest ‘Trump bump’ on this front.”

Roberts, who heads the West Virginia Chamber of Commerce, gave credit for part of the state’s comeback to the Trump administration.

“At least part of this is an administration that is emphasizing things that are good for West Virginia — energy production, manufacturing,” he said. Roberts also said the Trump administration’s focus on cutting regulatory red tape has given energy companies incentive to grow more.

But the main driver of West Virginia’s growth, rising global prices, is entirely out of Trump’s control. No president is powerful enough to impact the cost of a ton of metallurgical coal or a cubic foot of natural gas on the international market.

Despite its strong quarter, West Virginia still faces steeper demographic and economic challenges.

The median age of a West Virginia resident is 42.2 years old, older than all but three New England states; an older population both works less and relies on social services like healthcare more. More than one in six state residents live below the poverty line, higher than all but seven states. 

And so much of West Virginia’s economy is dependent on coal and gas mining that economists worry that another commodity slump would send the state right back down to the depths of a new recession.

“No matter what happens to coal, West Virginia desperately needs industrial diversification,” Deskins said. “We desperately need to see greater strength in tourism, or manufacturing, or other sectors.”