Since late March Econintersect has been forecasting monthly the economy was softening (forecasts here). The June 2011 Chicago Fed National Activity Index (CFNAI) confirms this forecast was correct – and has now fallen to the lowest level since October 2009.
The CFNAI is Econintersect’s primary “rear window” (coincident indicator) tool. As this index is never set in concrete, every month a good portion of the data is backwardly revised slightly – with the larger revisions occurring in the more recent data.
No data today (yet) is showing the economy is headed towards a recession. The long range indicators from ECRI are showing a global slowdown later this year (news here).
Econintersect will release its August 2011 economic forecast next week, and preliminary data continues to show the economic soft spot continuing and much less good.
Because of backward revisions and noise, Econintersect only uses the 3 month moving average portion of the index. This 3 month portion is also indexed to inflation and economic cycles. The Chicago Fed’s explanation of the movement this month:
The consumption and housing category contributed –0.31 to the index in June, up from –0.42 in May; the June contribution was the category’s highest since March 2010. Housing starts rose to 629,000 annualized units in June from 549,000 in May, and building permits increased to 624,000 annualized units in June from 609,000 in the previous month.
The contribution to the index from employment-related indicators decreased to –0.15 in June from –0.07 in May, marking its lowest level since June 2010. Total nonfarm payroll employment rose by only 18,000 in June after increasing by 25,000 in May. Similarly, the unemployment rate increased to 9.2 percent in June from 9.1 percent in May.
Production-related indicators made a contribution of –0.04 to the index in June, up slightly from –0.08 in May. Industrial production increased 0.2 percent in June after ticking down 0.1 percent in May, but manufacturing capacity utilization remained at 74.4 percent for the third straight month.
The sales, orders, and inventories category made the lone positive contribution to the index in June, +0.04, up from +0.02 in May. The Institute for Supply Management’s Manufacturing Purchasing Managers’ Inventories Index increased to 54.1 in June from 48.7 in May.
Forty-one of the 85 individual indicators made positive contributions to the index in June, while 44 made negative contributions. Fifty-two indicators improved from May to June, while 31 indicators deteriorated and two were unchanged. Of the indicators that improved, 21 made negative contributions.
The CFNAI explained:
With the significant amount of monthly revisions occurring, the three month moving average provides the best metric for economic activity levels.
The CFNAI is significant because it 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. Econintersect uses the three month moving average for its analysis as the index is quite noisy – and the three month moving average smooths out the data so trends are obvious.
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.
As the CFNAI is a summary index, to give it credibility the data must be assumed correct. This assumption has been justified in the past because the index has proven to have a remarkable 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.
July 2011 Economic Forecast: Summer Slowdown Continues by Steven Hansen
May 2011 Economic Forecast: Moderate Growth by Steven Hansen
April 2011 Economic Forecast: Likely At Sub-Cycle Peak by Steven Hansen
ECRI: Global Growth Peaking (GEI News)