By
Doug Short
:
According to the Chicago Fed's National Activity Index,
September economic activity slowed from the previous month, now at
-0.56. The indicator has been negative (meaning below-trend growth)
for six of the past eight months, and the all-important 3-month
moving average has been negative for all eight of those months and
21 of the last 27 months. Here are the opening paragraphs from the
report:
Led by declines in production-related indicators, the
Chicago Fed National Activity Index ((CFNAI)) decreased to
-0.56 in October from 0.00 in September. All four broad
categories of indicators that make up the index decreased from
September, and only two made positive contributions to the
index in October.
The index's three-month moving average, CFNAI-MA3, decreased
from -0.36 in September to -0.56 in October - its eighth
consecutive reading below zero. October's CFNAI-MA3 suggests
that growth in national economic activity was below its
historical trend. The economic growth reflected in this level
of the CFNAI-MA3 suggests subdued inflationary pressure from
economic activity over the coming year.
The CFNAI Diffusion Index also moved down in October,
decreasing to -0.32 from -0.14 in September. Thirty-one of the
85 individual indicators made positive contributions to the
CFNAI in October, while 54 made negative contributions.
Thirty-three indicators improved from September to October,
while 51 indicators deteriorated and one was unchanged. Of the
indicators that improved, 13 made negative contributions. [
Download PDF News Release
]
Elsewhere in the PDF report it is noted that Hurricane Sandy
negatively affected industrial production in October.
The Chicago Fed's
National Activity Index
((CFNAI)) is a monthly indicator designed to gauge overall economic
activity and related inflationary pressure. It is a composite of 85
monthly indicators as explained in this
background PDF file
on the Chicago Fed's website. The index is constructed so a zero
value for the index indicates that the national economy is
expanding at its historical trend rate of growth. Negative values
indicate below-average growth, and positive values indicate
above-average growth.
The first chart below shows the recent behavior of the index
since 2007. The red dots show the indicator itself, which is quite
noisy, together with the 3-month moving average (CFNAI-MA3), which
is more useful as an indicator of the actual trend for coincident
economic activity. As we can readily see, the CFNAI-MA3 trend since
February of this year has been one of slow economic
contraction.
(click to enlarge)
For a broad historical context, here is the complete CFNAI
historical series dating from March 1967.
(click to enlarge)
The next chart highlights the -0.7 level. The Chicago Fed
explains:
When the CFNAI-MA3 value moves below -0.70 following a
period of economic expansion, there is an increasing
likelihood that a recession has begun. Conversely, when
the CFNAI-MA3 value moves above -0.70 following a period
of economic contraction, there is an increasing
likelihood that a recession has ended.
|
The next chart highlights the -0.70 level and the value of the
CFNAI-MA3 at the start of the seven recessions during the timeframe
of this indicator. The 1973-75 event was an outlier because of the
rapid rise of inflation following the 1973 Oil Embargo. As for the
other six, we see that all but one started when the CFNAI-MA3 was
above the -0.70 level.
(click to enlarge)
The next chart includes an overlay of GDP, which reinforces the
accuracy of the CFNAI as an indicator of coincident economic
activity.
(click to enlarge)
Here's a chart of the CFNAI without the MA3 overlay - for the
purpose of highlighting the high inter-month volatility. Consider:
the index has ranged from a high 2.61 to a low of -4.85 with a
average monthly change of 0.60. That's 8% of the entire index
range! The latest reading is a month-over-month change of 0.56%,
which is close to the average volatility.
(click to enlarge)
Further underscoring the volatility is the roller-coaster list
of CFNAI monthly headlines from 2010 forward.
2010
|
2011
|
2012
|
●
Increased Sharply
(Jan)
●
Slowed
(Feb)
●
Improved
(Mar)
●
Continued to Improve
(Apr)
●
Continued to Expand
(May)
●
Declined
(Jun)
●
Rebounded
(Jul)
●
Weakened
(Aug)
●
Slowed Further
(Sep)
●
Picked Up
(Oct)
●
Slowed
(Nov)
●
Improved
(Dec) |
●
Slower
(Jan)
●
Near Average
(Feb)
●
Improved
(Mar)
●
Weakened
(Apr)
●
Remained Below Average
(May)
●
Again Below Average
(Jun)
●
Improved
(Jul)
●
Weakened
(Aug)
●
Improved
(Sep)
●
Up Slightly
(Oct)
●
Decreased
(Nov)
●
Improved
(Dec) |
●
Again Above Average
(Jan)
●
Growth Near Average
(Feb)
●
Decreased
(Mar)
●
Increased
(Apr)
●
Slower Growth
(May)
●
Increased
(Jun)
●
Increased
(Jul)
●
Weakened
(Aug)
●
Improved
(Sep)
●
Slower
(Oct) |
As the monthly chart depicts and the headline verbs reinforce,
it's unwise to read very much into the data for any specific month.
Also data revisions frequently make the real-time headline
subsequently inaccurate. The 3-month moving average is a better
number to watch.
The Long-Term Economic Trend
In the final chart, I've let Excel draw a linear regression
through the CFNAI data series. The slope confirms the casual
impression of the previous charts that National Activity, as a
function of the 85 indicators in the index, has been declining
since its inception in the late 1960s, a trend that roughly
coincides with the transition from a good-producing to a
post-industrial service economy in the information age.
(click to enlarge)
For a more detailed perspective on long-term economic trends,
see my latest
Understanding the CFNAI Components
, which I update and post a few hours after the CFNAI is
released.
See also
Weighing The Risks In International Oil Plays
on seekingalpha.com