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posted on 21 December 2015

November 2015 CFNAI Super Index Declined Marginally. Well Below Expectations.

Written by Steven Hansen

The economy's growth declined marginally based on the Chicago Fed National Activity Index (CFNAI) 3 month moving (3MA) average - and remains 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 -0.18 (originally reported as -0.20 last month) to -0.20. Three of the four elements of this index are in contraction.


  • 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.
  • The market (from Bloomberg) expected the monthly index value between -0.20 to 0.25 (consensus 0.15) versus the -0.30 reported.
  • 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 declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) moved down to -0.30 in November from -0.17 in October. Two of the four broad categories of indicators that make up the index decreased from October, and three of the four categories made negative contributions to the index in November.

The index's three-month moving average, CFNAI-MA3, decreased to -0.20 in November from -0.18 in October. November'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, increased to -0.20 in November from -0.25 in October. Thirty-seven of the 85 individual indicators made positive contributions to the CFNAI in November, while 48 made negative contributions. Thirty-nine indicators improved from October to November, while 44 indicators deteriorated and two were unchanged. Of the indicators that improved, 16 made negative contributions.

The contribution from production-related indicators to the CFNAI decreased to -0.27 in November from -0.11 in October. Industrial production declined by 0.6 percent in November after decreasing by 0.4 percent in October. Moreover, manufacturing production was unchanged in November, following an increase of 0.3 percent in the previous month.

Employment-related indicators contributed +0.05 to the CFNAI in November, down slightly from +0.08 in October. Nonfarm payrolls increased by 211,000 in November after rising by 298,000 in October, while the unemployment rate was unchanged at 5.0 percent in November.

The contribution of the personal consumption and housing category to the CFNAI edged up to -0.06 in November from -0.11 in October. Housing starts increased to 1,173,000 annualized units in November from 1,062,000 in October. In addition, housing permits moved up to 1,289,000 annualized units in November from 1,161,000 in the previous month. The sales, orders, and inventories category made a contribution of -0.02 to the CFNAI in November, up slightly from -0.03 in October.

The CFNAI was constructed using data available as of December 17, 2015. At that time, November 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.

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