Chicago Fed Shows Economic Activity Slower In October

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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



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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