econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 23 November 2015

October 2015 CFNAI Super Index Declined and Remains Below the Historical Trend Rate of Growth.

Written by Steven Hansen

The economy's growth declined based on the Chicago Fed National Activity Index (CFNAI) 3 month moving (3MA) average - and now is below the historical trend rate of growth (but still well above levels associated with recessions).

The three month moving average of the Chicago Fed National Activity Index (CFNAI) which provides a summary quantitative value for all the economic data being released - declined from -0.03 (originally reported as -0.09 last month) to -0.20. Three of the four elements of this index are in contraction.

PLEASE NOTE:

  • This index IS NOT accurate in real time (see caveats below) - and it did miss the start of the 2007 recession.
  • The headlines talk about the single month index which is not used for economic forecasting. Economic predictions are based on the 3 month moving average. The single month index historically is very noisy and the 3 month moving average would be the way to view this index in any event.
  • There was no expectations released by Bloomberg.
  • This index is a rear view mirror of the economy.

A value of zero for the index would indicate that the national economy is expanding at its historical trend rate of growth, and that a level below -0.7 would be indicating a recession was likely underway. Econintersect uses the three month trend because the index is very noisy (volatile).

CFNAI Three Month Moving Average (blue line) with Historical Recession Line (red line)

As the 3 month index is the trend line, the trend is currently showing a marginally decelerating rate of growth. As stated: this index only begins to show what is happening in the economy after many months of revision following the index's first release.

CFNAI Three Month Moving Average Showing Month-over-Month Change

The CFNAI is a weighted average of 85 indicators drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories.

CFNAI Components - Production and Income (orange line), Employment / Unemployment & Hours (green line), Personal Consumption & Housing (blue line), and Sales / Orders & Inventory (red line)

Low Personal Consumption has been a headwind on the index for the last two years. The other three elements of the CFNAI have taken turns dragging the index down - although this month 3 of 4 elements were neutral or negative. The Chicago Fed's explanation of the movement this month:

Led by improvements in employment- and production-related indicators, the Chicago Fed National Activity Index (CFNAI) rose to -0.04 in October from -0.29 in September. Two of the four broad categories of indicators that make up the index increased from September, but only one category made a positive contribution to the index in October.

The index's three-month moving average, CFNAI-MA3, decreased to -0.20 in October from -0.03 in September. October's CFNAI-MA3 suggests that growth in national economic activity was somewhat 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, which is also a three-month moving average, decreased to -0.18 in October from -0.07 in September. Forty-one of the 85 individual indicators made positive contributions to the CFNAI in October, while 44 made negative contributions. Forty-six indicators improved from September to October, while 39 indicators deteriorated. Of the indicators that improved, 16 made negative contributions.

The contribution from production-related indicators to the CFNAI increased to -0.05 in October from -0.17 in September. Manufacturing production moved up 0.4 percent in October, following a decline of 0.1 percent in September. However, industrial production declined by 0.2 percent in October for the second straight month. The sales, orders, and inventories category made a contribution of -0.01 to the CFNAI in October, down slightly from +0.01 in September.

Employment-related indicators contributed +0.11 to the CFNAI in October, up from -0.06 in September. Nonfarm payrolls increased 271,000 in October after rising 137,000 in September, and the unemployment rate ticked down to 5.0 percent in October from 5.1 percent in the previous month.

The contribution of the personal consumption and housing category to the CFNAI ticked down to -0.09 in October from -0.07 in September. Housing starts declined to 1,060,000 annualized units in October from 1,191,000 in September. However, housing permits moved up to 1,150,000 annualized units in October from 1,105,000 in the previous month.

The CFNAI was constructed using data available as of November 19, 2015. At that time, October data for 51 of the 85 indicators had been published.

The CFNAI explained:

With the significant amount of monthly backward revisions occurring, the three month moving average provides a better metric for economic activity levels.

Econintersect considers the CFNAI one of the best single metrics to gauge the real economic activity for the U.S. - and puts the entire month's economic releases into their proper perspective, although it is almost a month after the fact. It correlates well and historically has lead GDP - however its correlation post 2007 recession (New Normal) is uncertain. [graph below updated through May 2012 CFNAI]

As the CFNAI is a summary index, the data must be assumed correct to give it credibility. This assumption has been justified in the past because the index has proven to have a good correlation to the overall economy. When using this index, it is trend direction which is important - not necessarily the value when the index is above -0.7, the historical boundary between expansion and contraction.

Caveats on the Use of the Chicago Fed National Activity Index

The index is quite noisy, and the only way to view the data is to use the 3 month moving average. As this index is never set in concrete, each month a good portion (usually from January 2001 onwards) of the data is backwardly revised slightly. The most significant revision is in the data released in the last six months due to revisions of the 85 indices which are embodied into the CFNAI.

Even the 3 month moving average has over time significant backward revision. This is due both to changing methodology and backward revisions of this index's data sources. This point is important as the authors of this index have stated that -0.7 value is the separation between economic expansion and contraction. The graph below shows the difference between the original published index values and the values of the index as of August 2011.

This index seems to continuously creep - and when using this index in real time,Econintersect would assume the index values when first released could easily be off in a range +0.2 to -0.2 as the data in the future will be continuously revised. However, there are times when the uncertainty in real time can be much larger. For seven consecutive months in the Great Recession, backward revisions ranged from -0.7 to -0.9. In such times of severe economic stress the CFNAI has little real time accuracy, although it still definitely was showing that the economy was bad. It simply did not reflect exactly how bad in real time.

We can compare the CFNAI to ECRI's coincident index which is released monthly almost in real time. It is true that using ECRI's coincident index, the year-over-year rate of change is at recession levels - however, the CFNAI's rate of change provides a different conclusion.

In real time, ECRI's coincident indicator may be providing a better yardstick for the Wall Street economy. While in hindsight, CFNAI seems more intuitive - but is inaccurate in real time because of backward revision. GDP lives in its own world (as opposed to what economy is experienced by the population in their own lives) and has general correlation to most broad forecasts or coincident indexes as a selected view of the overall economy. However, I do not believe GDP has a good correlation to the Main Street economy.



>>>>> Scroll down to view and make comments <<<<<<



Permanent link to most recent post on this topic

Click here for Historical Releases Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.







Econintersect Economic Releases


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
Proud to Be a Nihilist: Bill Mitchell on Econometrics and Numerical Prediction
Fixing Obamacare - Why It Won’t Be Easy
News Blog
Why Your Phone Battery Gets Worse With Time
25 November 2016: ECRI's WLI Growth Index Improves
November 2016 BLS Jobs Growth Continues To Be OK, Just Not Great
Rail Week Ending 26 November 2016: Another Positive Week
It Will Take More Than A Wall To Solve Border Crime
Infographic Of The Day: How The Power Grid Actually Works
Early Headlines: Asia Stocks Down, Oil Eases, More Trump Noms, May Rebuked At Polls, Italy's 5 Star Movmt, Assad's Treachery, India's Currency Mess, Canada's Housing Bubble Popping? And More
30 Years Of American - German Trade Relations
How To Measure Audience Engagement Online
Chinese Smartphones On The Rise
Why Journalistic 'Balance' Is Failing The Public
75,000 Children In Nigeria At Risk Of Starving To Death
What We Read Today 01 December 2016
Investing Blog
Anticipating The Trend Change Makes For The Lowest Risk
It's Early Winter - Watch Out For Thin Ice
Opinion Blog
What Would It Take For Inflation To Surge - Or Even Just Emerge?
How Can China's Renminbi Deal With The Rising Dollar Risk?
Precious Metals Blog
Silver Prices Rebounded Today: Where They Are Headed
Live Markets
02Dec2016 Market Update: WTI Crude Climbed Back Up To Previous 51 Handle, US Dollar Index Trading At The100 Level, Oil Rig Count At 10-Month High
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government



Crowdfunding ....






























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved