The Chicago Fed National Activity Index (CFNAI) was essentially flat in November 2010 – however, Econintersect warns that November and December releases have been revised more than indexes at other times of the year. The headlines:
Led by declines in employment-related indicators, the Chicago Fed National Activity Index decreased to –0.46 in November from –0.25 in October. Three of the four broad categories of indicators that make up the index deteriorated from October to November, with only the production and income category improving.
The index’s three-month moving average, CFNAI-MA3, ticked up to –0.41 in November from –0.42 in October. November’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.
Employment-related indicators made a contribution of –0.16 to the index in November, down from +0.10 in October. Total nonfarm payroll employment edged up by 39,000 in November, after increasing by 172,000 in October; and the unemployment rate increased to 9.8 percent in November from 9.6 percent in the previous month.
The consumption and housing category contributed –0.42 to the index in November, ticking down from –0.40 in October. Housing starts increased to 555,000 annualized units in November from 534,000 in October, but building permits declined to 530,000 annualized units in November from 552,000 in the previous month.
Production-related indicators made a contribution of +0.08 to the index in November, up from –0.02 in October. Total industrial production rose 0.4 percent in November after edging down 0.2 percent in October, and manufacturing capacity utilization increased to 72.8 percent in November from 72.6 percent in the previous month.
The sales, orders, and inventories category contributed +0.04 to the index in November, down slightly from +0.07 in October.
Thirty-five of the 85 individual indicators made positive contributions to the index in November, while 50 made negative contributions. Thirty-one indicators improved from October to November, while 54 indicators deteriorated. Of the indicators that improved, 14 made negative contributions.
This month data has been revised back to July 2009 – the CFNAI is a work in progress. The revisions this month are considered minor. The three month moving average is the gauge to watch as the index ends up being quite noisy.
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 a single metric to gauge the real economic activity for the economy – and puts the entire month’s economic releases into their proper perspective.
As the CFNAI is a summary index, the data must be assumed correct – and it has a remarkable correlation to the economy. When using this index, it is trend direction which is important – not necessarily the value when the index is above -0.7. The CFNAI is telling us the economy likely did not improve in November.
However, over the last 5 years – the Chicago Fed revises the November and December data more than any of the other month – approximately 33% larger adjustment (both up and down) than at other times during the year. It is likely the economy moves around more at the end of the year. The Chicago Fed must estimate much of the data when the each month’s early data is first released – and then revise when data is updated.
This is not a criticism of the index, which Econintersect believes is the best coincident gauge in the economic world. But like any tool, you must understand it’s limitations.