CFNAI Continues to Show Economic Soft Spot in August 2011

Since late March Econintersect has been forecasting monthly the economy was softening (forecasts here).  Econintersect’s August forecast was for an economy not growing – and the August 2011 Chicago Fed National Activity Index (CFNAI) validates this opinion (using the three month moving average).

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.  Because of the noise in the base index, this economic tool is useful only if one uses the 3 month average and trends. [last month’s values highlighted in below table]  

This index measures real growth against potential growth – and real growth has been weakening against potential growth since the beginning of 2010.

If the trend lines hold, this index will enter recession territory some time in 2012.

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 in a less good channel.
  • 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 index has been negative since April 2011.
  • The long range indicators from ECRI are showing a global slowdown later this year (news here). Econintersect’s transport indicators have shifted to positive indicating a building opposing trend.
  • Econintersect will release its October 2011 economic forecast next week, and preliminary data now shows this is likely the second month the USA economy will see economic contraction.

The Chicago Fed’s explanation of the movement this month:

Led by declines in production- and employment-related indicators, the Chicago Fed National Activity Index decreased to –0.43 in August from +0.02 in July.

Contributions from three of the four broad categories of indicators that make up the index declined from July, and three of the four were negative in August. The index’s three-month moving average, CFNAI-MA3, ticked down to –0.28 in August from –0.27 in July. August’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 +0.01 to the index in August, down from +0.26 in July. Industrial production edged up 0.2 percent in August after rising 0.9 percent in July. Manufacturing production slowed, increasing 0.5 percent in August after increasing 0.6 percent in the previous month; but capacity utilization increased to 75.0 percent from 74.7 percent over the same period.

Forty-one of the 85 individual indicators made positive contributions to the index in August, while 44 made negative contributions.  Thirty-five indicators improved from July to August, while 49 indicators deteriorated and one was unchanged.

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.

Related Articles:

Econintersect Economic Forecasts

Past CFNAI posts

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