Over the pastyear ,economists have noticed an unusual pattern
as they digested the series of monthly reports on housing,
consumer confidence, purchasing managers, trade flows and other
key economic inputs.
These reports showed consistently mixed signals, though it was
clear that the U.S.economy was faring OK. And that has led to
hopes of more consistently positive reports in the second half of
2013 and into 2014. By next year, many economists have come to
expect a firmer backdrop, withGDP perhaps growing in the 2.5% to
Yet it may be time to start questioning that brightening
outlook. Perhaps the greatest measure of economic activity -- one
ignored by most investors, unfortunately -- is flashing yellow
and may soon be flashingred .
While many economic surveys aim to capture a slice of the U.S.
economy, the Chicago Fed's National ActivityIndex (CFNAI) looks
at 85 different economic inputs focused on production,income ,
employment, personal consumption and housing. A quick snapshot of
the most recent reading actually shows a slight improvement from
the previous month.
Yet economists at the Chicago Fed emphasize the importance of
looking at longer-term trends rather than monthly snapshots.
That's why they suggest that the three-monthmoving average of
these reports is where you should focus -- and by that score, the
CFNAI is in trouble.
CFNAI 3-Month Moving Average
Source:Federal Reserve Bank of Chicago
Though the CFNAI began the year in positive territory, it has
recently slipped below negative 0.40.Note that the Chicago Fed
believes that a reading of negative 0.70 signals entry into
arecession , and we still have a ways to go before that
In addition, the current slide could prove short-lived. After
all, this index slid to negative 0.49 in October 2012 and then
rebounded. Back then, the economy was looking tenuous as
businesses and consumers were frozen by fears of a possible
government shutdown (which never came to pass).
This time around, gauges of consumer activity appear to be
holding their own, but several business gauges -- such as the
purchasing managers' index,sales trends andinventory changes
highlight a slowly weakening business sector.
The question is whether the ongoing challenges in Europe, the
incipient slump in China, Brazil and elsewhere, and the impact of
our own sequesterwill lead to further weakness in the business
sector. This is anissue that you should be closely monitoring if
you remain fully invested in thestock market , especially if
you're holding economically sensitivestocks .
Later this week, a number of Federal Reserve members will be
weighing in on the economy, including:
- Minneapolis Fed President Narayana Kocherlakota, speaking
on Wednesday in Seoul
- Fed Governor Jerome Powell speaking on Thursday at the
Bipartisan Policy Center
- Atlanta Fed President Dennis Lockhart speaking on Thursday
- On Friday, three more Fed presidents -- Jeffrey Lacker,
Sandra Pianalto and John C. Williams -- will speak about the
economy at various public forums.
- Interested investors should track these economists this
week, as they may shed more light on what appears to be a
slowing U.S. economy.
Earnings Season Commentary
Of course these Fed governors and presidents will be weighing in
just as many companies are finishing up their second quarter and
preparing to give their outlooks for the remainder of 2013. At
this point, it's hard to see how the coming earnings season
commentary will be optimistic. To be sure, expectations going
into each of the past few earnings seasons have been dim, and
companies have deliveredguidance that was not nearly as dire some
My biggest concern: The sharp recent weakening in many
currencies could lead U.S. multinational firms to trim
expectations as foreign sales are denominated back into dollars.
On a related note, how will recent turmoil that has emerged in
China (bankingliquidity ), Turkey and Brazil (social unrest), and
Greece and Italy (spikingbond yields) affect company
Risks to Consider:
As anupside risk, the CFNAI could rebound as we move past the
effects of the recent government sequester.
Action to Take -->
Although the Chicago Fed's National Activity Index dipped to
similarly concerning levels in October before rebounding, you
shouldn't dismiss this current reading. Prior to October, the
last time this reading was less than negative 0.49 was back in
2008 and 2009, when the economy was on extremely tenuous ground.
Though it's unlikely that we'll see as sharp an economic slump as
we did back then, it's becoming harder to rule out at least a
mild recession in comingquarters -- which is food for thought
with the major market averages still near all-time highs.