Chicago Fed National Activity Index (CFNAI) Rising or Falling?

According to the July 2010 release of the Chicago Fed National Activity Index (CFNAI), the index rose to its historical average of 0.0. The CFNAI is a super index which is a weighted average of 85 indicators of national economic activity. The indicators are 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.

On the other hand, this noisy index is viewed by analysts using 3 month moving averages – and for July 2010 the index moved marginally lower.

This analyst believes the CFNAI three month moving average is the best metric for coincident data. In common English this means this index has proven to be our best indicator of our current economic situation. It is released almost one month after the period end, and is subject to revision for a minimum of six months as more precise data is issued by the 85 indicators whose data is weighted and consolidated.

The way to use the 3 month average is to look at trend lines. We have declined now for two months in a row. At best, our economy has stopped expanding. At worst, the economy is starting to decline. The 3 month moving average is currently -0.17, and if the average falls below -0.7 it is likely a recession is underway.

However, two months of data is not a trend.

The Chicago Fed continues to change the definition of when we should consider a recession over – and now are saying a recession is definitely over if the index rises above +0.2. This occurred in only one month (May 2010). In any event, this index has never clearly demonstrated that the recession ended.

If the NBER does not end the recession, the CFNAI definition of when the recession ended will likely be changed again.

This index is also used to gauge the potential for inflation if the index rises above +0.7.

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