The Chicago Fed National Activity Index (CFNAI) showed a slight decrease in monthly activity in January 2011 but the important 3 month moving average edged higher on the back of significant backward revision.
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. 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. The headlines for January:
Led by declines in production-related indicators, the Chicago Fed National Activity Index decreased to –0.16 in January from +0.18 in December. Three of the four broad categories of indicators that make up the index made positive contributions in January, but they were offset by continued weakness in the consumption and housing category.
The index’s three-month moving average, CFNAI-MA3, edged up to –0.10 in January from–0.14 in December, increasing for the third straight month. January’s CFNAI-MA3 suggests that growth in national economic activity was slightly 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.
Thirty-nine of the 85 individual indicators made positive contributions to the index in January, while 46 made negative contributions. Thirty-nine indicators improved from December to January, while 45 indicators deteriorated and one was unchanged. Of the indicators that improved, 12 made negative contributions. The index was constructed using data available as of February 17, 2011. At that time, January data for 52 of the 85 indicators had been published. For all missing data, estimates were used in constructing the index.
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 January.
Econintersect’s economic forecast for January also predicted a flat economy. The February forecast was for an improving economy.