Since late March Econintersect has been forecasting monthly the economy was softening (forecasts here). The July 2011 Chicago Fed National Activity Index (CFNAI) has a different opinion showing economic activity picked up in July.
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. This month there was a subtle revision of the entire data series.
Despite the headlines, this index is telling a mixed story about the economy, with even the long and short term trend lines in conflict.
This is a super coincident indicator – which by definition is a rear view economic picture. What can we take from this and other data we are seeing:
- The way to use coincident indices is to trend. Trend lines hold until they do not hold. Trending misses economic turning points. The trend of this index remains less good: Even though the July release shows improvement, the down trend line has not been broken.
- Because of index noise, the three month moving average is used to trend. the current values remain above recessionary levels. Ignoring the three month moving average, the monthly index is in the third month of an uptrend. This is contrary to the 3 month moving average which remains in a long term downtrend.
- The long range indicators from ECRI are showing a global slowdown later this year (news here). Econintersect’s transport indicators are deeply negative and are suggesting the economy may be approaching recession.
- Econintersect will release its September 2011 economic forecast next week, and preliminary data now shows this may be the first month the USA economy will see economic contraction since that was briefly indicated late last year .
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:
Led by improvements in production-related indicators, the Chicago Fed National Activity Index increased to –0.06 in July from –0.38 in June. Three of the four broad categories of indicators that make up the index improved in July; only the sales, orders, and inventories category deteriorated from June.
The index’s three-month moving average, CFNAI-MA3, increased to –0.29 in July from –0.54 in June. July’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. Likewise, the economic slack reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.
Production-related indicators made a contribution of +0.28 to the index in July, up sharply from +0.03 in June. Industrial production increased 0.9 percent in July after rising 0.4 percent in June. Manufacturing production, particularly auto production, rebounded; and manufacturing capacity utilization rose to 75.0 percent in July from 74.6 percent in the previous month.
Employment-related indicators contributed +0.05 to the index in July, an increase from –0.10 in June. Total nonfarm payroll employment increased by 117,000 in July after edging up 46,000 in June; and the unemployment rate ticked down to 9.1 percent in July from 9.2 percent in the previous month. The consumption and housing category also improved: Its contribution to the index was –0.33 in July, up slightly from –0.34 in June.
The sales, orders, and inventories category was the only one to deteriorate in July. It contributed –0.06 to the index in July, down from +0.03 in June. The Institute for Supply Management’s Manufacturing Purchasing Managers’ New Orders Index declined to 49.2 in July, falling below 50 for the first time since June 2009.
Forty-three of the 85 individual indicators made positive contributions to the index in July, while 42 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. As mentioned previously, 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 more 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, 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 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.