The December 2011 Chicago Fed National Activity Index (CFNAI) release shows the 3 month moving average of -0.08 – almost indicating the economy was expanding at potential. The index is higher than the levels one year ago, and has broken out of its range channel it has languished in for the last 8 months.
The Chicago Fed National Activity Index (CFNAI) is Econintersect’s primary coincident indicator tool as it provides a summary quantitative value for all the economic data being released. The data is not spun or explained – it is what it is. However, this index may not be accurate in real time (see caveats below) – and it did miss the start of the 2007 recession.
Note that a zero value for the index indicates 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).
This index measures real growth against potential growth – and real growth has been weakening against potential growth since the beginning of 2010. Prior to this month’s data release and since the end of 1Q2011, the index has remained in a tight range – it could be said the index has a flat trend – neither improving or degrading. The December 2011 data release now shows an improvement.
This is a super coincident indicator – which by definition is a rear view economic picture.
The Chicago Fed’s explanation of the movement this month:
The contribution from production-related indicators to the index rose sharply to +0.24 in December from –0.28 in November. Industrial production increased 0.4 percent in December after edging down 0.3 percent in the previous month. Similarly, manufacturing production rose by 0.9 percent in December after declining by 0.4 percent in November, and manufacturing capacity utilization increased to 75.9 percent in December from 75.3 percent in the previous month.
The employment-related indicators’ contribution to the index was +0.22 in December, up from +0.08 in November. The unemployment rate decreased from 8.7 percent in November to 8.5 percent in December. Likewise, over the same period, the monthly average of weekly initial claims for unemployment insurance fell from 395,000 to 375,000—its lowest level since May 2008.
The sales, orders, and inventories category made a contribution of +0.01 to the index in December, remaining level from November. In contrast, the contribution from the consumption and housing category to the index was –0.29 in December, down slightly from –0.27 in November. Housing starts decreased to 657,000 annualized units in December from 685,000 in November, and housing permits ticked down to 679,000 annualized units from 680,000 over the same period.
Fifty-three of the 85 individual indicators made positive contributions to the index in December, while 32 made negative contributions. Fifty-six indicators improved from November to December, while 27 indicators deteriorated and two were unchanged. Of the indicators that improved, 11 made negative contributions. The index was constructed using data available as of January 19, 2012. At that time, December data for 50 of the 85 indicators had been published. For all missing data, estimates were used in constructing the index.
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.
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. It correlates well to GDP.
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.
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.