May 2011 CFNAI: Data Shows Economic Soft Spot Began in April

Econintersect’s primary “rear window” tool is the Chicago Fed National Activity Index (CFNAI) whose May 2011 data confirmed the current economic soft spot began in April 2011.

As this index is never set in concrete, every month a good portion of the data is backwardly revised slightly – with the larger revisions occurring in the more recent data.

Econintersect in its economic forecasts beginning in April has warned the economy was at a sub-cycle peak.  The underlying non-monetary pulse points have been showing flat growth (meaning year-over-year improvement compared to previous months is no longer getting better).

No data today (yet) is showing the economy is headed towards a recession.  The long range indicators from ECRI are showing a global slowdown later this year (news here).

Econintersect will release its July 2011 economic forecast next week,  and preliminary data continues to show the economic soft spot continues.

Because of backward revisions and noise, Econintersect only uses the 3 month moving average portion of the index.  This 3 month portion is also indexed to inflation and economic cycles.  The Chicago Fed’s explanation of the movement this month:

Production-related indicators made a contribution of +0.05 to the index in May, up from –0.16 in April. Manufacturing production increased 0.4 percent in May after declining 0.6 percent in April, and manufacturing capacity utilization rose to 74.5 percent in May from 74.2 percent in the previous month. In contrast, the Institute for Supply Management’s Manufacturing Purchasing Managers’ Production Index declined sharply to 54.0 in May from 63.8 in April.

The consumption and housing category contributed –0.36 to the index in May, up from –0.40 in April. Housing starts increased to 560,000 annualized units in May from 541,000 in April, and building permits rose to 612,000 annualized units in May from 563,000 in
the previous month.

Employment-related indicators made a contribution of –0.04 to the index in May, down slightly from –0.02 in April. Nonfarm payrolls increased by 54,000 in May after rising by 232,000 in the previous month, while average weekly initial unemployment insurance claims edged lower in May after rising by nearly 40,000 in April. The sales, orders, and inventories category also made a small negative contribution to the index in May of –0.02, down from +0.02 in April.

Forty of the 85 individual indicators made positive contributions to the index in May, while 45 made negative contributions. Forty-four indicators improved from April to May, while 40 indicators deteriorated and one was unchanged. Of the indicators that improved, 17 made negative contributions. The index was constructed using data available as of June 17, 2011. At that time, May data for 52 of the 85 indicators had been published. For all missing data, estimates were used in constructing the index.

The CFNAI explained:

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.

Related Articles:

Krugman Implies Inflation Will Add Employment – June 2011 Economic Forecast by Steven Hansen

May 2011 Economic Forecast: Moderate Growth by Steven Hansen

April 2011 Economic Forecast: Likely At Sub-Cycle Peak by Steven Hansen

ECRI: Global Growth Peaking (GEI News)