Regardless of whether the Chicago Fed’s National Activity Index (CFNAI) is up or down this month, the 3 month moving average has been in positive territory for the last three months. Positive territory indicates that the national economy is expanding at its historical trend rate of growth.
Led by gains in production indicators, the Chicago Fed National Activity Index increased to +0.26 in March from +0.16 in February. March marked the fourth consecutive positive reading of the index and the sixth consecutive positive contribution from employment-related indicators. Neither has exhibited such patterns since April 2006.
The index’s three-month moving average, CFNAI-MA3, edged down to +0.20 in March from +0.27 in February, but remained positive for the third consecutive month for the first time since May 2010. March’s CFNAI-MA3 suggests that growth in national economic activity was somewhat above its historical trend. With regard to inflation, the CFNAI-MA3 suggests limited inflationary pressure from economic activity over the coming year.
Production-related indicators made a contribution of +0.39 to the index in March, up from +0.11 in February. Total industrial production rose 0.8 percent in March after increasing 0.1 percent in February. In addition, manufacturing capacity utilization increased to 75.3 percent in March from 74.9 percent in February. Also in March, the Institute for Supply Management’s Manufacturing Purchasing Managers’ Production Index reached its highest level since January 2004.
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.
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.
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