The Chicago Fed National Activity Index (CFNAI) was up slightly in December 2010. However, Econintersect warns that November and December releases have been revised in subsequent months more than indexes at other times of the year. We may not know the final reading until perhaps March. The headlines:
Led by gains in employment- and production-related indicators, the Chicago Fed National Activity Index increased to +0.03 in December from –0.40 in November. December marked the first time in five months that the index had a positive reading. Three of the four broad categories of indicators that make up the index made positive contributions in December, while the consumption and housing category continued to make a large negative contribution.
The index’s three-month moving average, CFNAI-MA3, increased to –0.22 in December from –0.36 in November. The CFNAI-MA3 suggests that despite the improvement in December, growth in national economic activity remained below its historical trend for the seventh consecutive month. 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.
Production-related indicators made a contribution of +0.26 to the index in December, up from +0.04 in November. Total industrial production rose 0.8 percent in December after increasing 0.3 percent in November. Similarly, manufacturing industrial production rose 0.4 percent in December after increasing 0.3 percent in November, and the manufacturing capacity utilization rate increased to 73.2 percent in December from 72.9 percent in the previous month.
This month data has been revised back well into 2008 – the CFNAI is a work in progress. The revisions this month are considered relatively 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.