Published: July 13, 2008 02:00 am            

State, national economies flirt with recession

West Virginia economist Hammond sees growth over five-year period ahead

FAIRMONT — Like the national economy, West Virginia’s economy is flirting with a recession, says George W. Hammond, a West Virginia University economist who tracks the state’s economy.

Hammond is the associate director of WVU’s Bureau for Business and Economic Research. He and his doctoral candidates in economics have been giving the Legislature a state economic forecast every November for about a decade.

In his midyear review, Hammond said “things have slowed down to such an extent at this point that West Virginia and the U.S. economies are in that danger zone for falling into a recession.”

While the state and national economies may shrink or not even grow — the national economy recorded an anemic 1 percent annual average in the first quarter — for the rest of the year, Hammond’s long-term state forecast through 2012 is not all gloomy.

“While things could get moderately ugly over the next year, year and a half, or two years, over the five-year period we’re likely to grow,” but not as fast as the national economy in jobs or per capita personal income, he said.

Hammond was a guest speaker at “Finance University,” a seminar at the University of Charleston. State Auditor Glen B. Gainer III sponsors the session for state teachers and other groups every year.

Here are Hammond’s forecasts for four key parts of the state’s economy:

• Job growth outlook — West Virginia is forecast to see little job growth during the next year, and is in the danger zone of slipping into recession. On average during the next five years, the state is forecast to add jobs, but at a slow rate.

• Real per capita personal income — The state is forecast to generate gains in real per capita personal income on average during the next five years, but growth is likely to be below the national average. That means that the state's income gap with the nation is likely to expand.

• Population — West Virginia’s population is forecast to remain roughly stable during the next five years, at around 1.8 million residents.

• Unemployment rate — The state's unemployment rate is forecast to bump up during the next year, as job growth slows, but then trend back down to the 4.5 percent range by 2012.

The National Bureau of Economic Research defines a recession “as a sustained, diffused and significant decline in the level of economic activity.” The definition is cited in the Winter 2008 issue of the West Virginia Business and Economic Review.

By sustained, the NBER means a recession must last longer than a month or two. The shortest national recession in the post-World War II era lasted six months, from January to July 1980. The average recession in the modern era lasts about 10 months.

The effects of a recession must be diffused or felt throughout most sectors of the economy. A downturn in manufacturing alone, for example, is not a recession.

A growth slowdown, say from 4 percent to 2 percent, also does not qualify as a recession. In other words, a decline means negative results.

A slowdown in consumer spending, the home mortgage decline and a softening of exports are slowing the national economy, Hammond said.

Looking back to 2003 and forward to the first quarter of this year, Hammond said the state added 31,000 net new jobs in that period. That’s a growth rate of about 1 percent per year, lower than the national annual average of 1.3 percent.

“But in the last year (back to the first quarter of 2007), West Virginia has only added about 2,000 new jobs,” he said.

That means a job growth rate of just one-quarter of 1 percent, half of the national rate during the same period.

The decline in new job growth centers on the loss of jobs in the goods-producing sector of the state’s economy: manufacturing, natural resources and mining and construction.

“Those three sectors combined for about 8,600 net new jobs from the middle of 2003 through early 2007,” he said. In the last year, however, “this sector has lost 3,000 jobs.”

The service sector, however, has seen some job growth. The sector includes health care, leisure and hospitality and business and professional services.

The leisure and hospitality industry includes the state’s gambling industry with its four race tracks and neighborhood video gaming parlors.

Production in the state’s mining industry has roughly stabilized at 150 million to 155 million tons per year over the last five years. Regulatory concerns over mountaintop removal requirements and the continuing impact of the 2000 amendments to the 1990 Clean Air Act are challenging the industry.

“The industry is also talking about meeting ‘increasingly challenging geologic conditions’” he said. The industry is finding it “may have mined the easy coal already, and what’s left to get are smaller, more narrow seams that cost more to mine and are more difficult to mine.”

Still, demand is strong for metallurgical and steam coal. In the spot market, coal prices have rocketed upwards in the last year, from about $45 per ton to over $100 per ton.

In construction, once power plant activity in Monongalia County is taken out of consideration, “we’ve actually got lower construction in 2008 than we do in 2007, at least looking at the same window of the first five months of the year.”

Hiring in the natural gas sector is booming, particularly in exploration. About 2,000 jobs have been added in that field this decade, Hammond said.

The consensus among economists is that the national economy will head into a recession in the last half of the year.

Still, the unknowns outweigh the knowns in perceiving how the oil shock, credit problems in the financial markets and a weakening dollar are going to impact the national economy, Hammond said.

“As Yogi Berra said, ‘Forecasting is difficult, especially about the future,’” he said of his five-year projections for the state’s economy. The WVU Bureau of Business and Economic Research’s annual state economic outlook and other studies are available online at this address: www.bber.wvu.edu.

The bureau also uses Global Insight for some of its analysis and research on the national economy. Global Insight studies are online at this address: www.globalinsight.com.

Hammond said most of the state, save for four Eastern Panhandle counties — Berkeley, Jefferson, Morgan and Hampshire — is not exposed to the national housing correction.

The state is exposed to the double-edged sword of rising energy prices, however. Manufacturers are going be to paying more for energy and so are consumers.

Rising coal prices are “probably a good thing for West Virginia” inasmuch as that could lead to new mines, more jobs and higher production. It also could help state revenues.

The other side is a rise in oil and natural gas prices at the same time and the impact of that in global markets. The state and nation now depend on manufactured goods and services provided by other nations, Hammond said.

“As oil prices and overall energy affect international markets adversely, that feeds back to West Virginia. So I don’t think West Virginia is out of the woods,” he said.

Rising coal prices “cannot keep West Virginia out of a recession if the national and international economies fall.”

In summary, Hammond said the rough patch in the state economy is “likely to last about a year to a year and a half” or possibly longer.

E-mail Bill Byrd at bbyrd@timeswv.com.

        

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