National Economic Index Nearing Recession Levels in August 2010

What a difference on month makes.  Flying on the heels of significant backward revision, the Chicago Fed National Activity Index (CFNAI)  and its three month moving average fell to -0.53 and -0.42 respectively in August 2010.  For a quick review of last months index see Chicago Fed National Activity Index (CFNAI) Rising or Falling? A reading of -0.7 is considered recession territory.

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.

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 three months in a row.   The backward revision in the index has magnified this decline.  Three months of a downward data is a trend, and we are so close to the -0.7 recession indicator line that it is no longer unthinkable a recession is near.

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

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