The CFNAI is Econintersect’s primary “rear window” (coincident indicator) tool as it provides a summary quantitative value for all the economic data being released. The data is not spun or explained – it is what it is. The index is quite noisy, and the only way to view the data is to use the 3 month moving average.
As this index is never set in concrete, each month a good portion of the data is backwardly revised slightly. With today’s September 2011 release, can we take the current 3 month moving average of -0.21 (which is neither recessionary or good) to the bank? Note that a zero value for the index indicates that the national economy is expanding at its historical trend rate of growth.
Even the 3 month moving average has over time significant backward revision. This is due both to changing methodology and backward revisions of this index’s data sources. This point is important as the authors of this index have stated that -0.7 value is the separation between economic expansion and contraction. The graph below shows the difference between the original published index values and the values of the index as of August 2011.
This index seems to continuously creep – and when using this index in real time, Econintersect would assume the index values released today could easily be off in a range +0.2 to -0.2 as the data in the future will be continuously revised. However, there are times when the uncertainty in real time can be much larger. For seven consecutive months in the Great Recession, backward revisions ranged from -0.7 to -0.9. In such times of severe economic stress the CFNAI has little real time accuracy, although it still definitely was showing that the economy was bad. It simply did not reflect exactly how bad in real time.
This index measures real growth against potential growth – and real growth has been weakening against potential growth since the beginning of 2010. However, over the last six months, the index has remained in a range between -0.20 and -0.30 except for June which was -0.55. Optimistically, it can be said the index has a flat trend – neither improving or degrading.
This is a super coincident indicator – which by definition is a rear view economic picture.
The Chicago Fed’s explanation of the movement this month:
Employment-related indicators contributed +0.04 to the index in September, an increase from –0.12 in August. Civilian employment rose 0.3 percent in September after an increase of 0.2 percent in the prior month. However, the unemployment rate was unchanged at 9.1 percent in September.
Production-related indicators made a contribution of +0.02 to the index in September, up from –0.06 in August. Industrial production edged up 0.2 percent in September after remaining flat in August. Manufacturing production rose 0.4 percent in September after increasing 0.3 percent in August. Additionally, manufacturing capacity utilization edged up to 75.1 percent in September.
The contribution from the consumption and housing category to the index rose to –0.30 in September from –0.38 in August. Housing starts improved to 658,000 annualized units in September from 572,000 in August. Conversely, housing permits decreased to 594,000 annualized units from 625,000 over the same period. The sales, orders, and inventories category contributed +0.01 to the index in September, up slightly from –0.03 in August.
Thirty-nine of the 85 individual indicators made positive contributions to the index in September, while 46 made negative contributions. Fifty-six indicators improved from August to September, while 27 indicators deteriorated and two were unchanged. Of the indicators that improved, 28 made negative contributions. The index was constructed using data available as of October 20, 2011. At that time, September 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 a better 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. As mentioned previously, 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 more obvious.
Econintersect considers the CFNAI one of the best single metrics to gauge the real economic activity for the U.S. – and puts the entire month’s economic releases into their proper perspective, although it is almost a month after the fact.
As the CFNAI is a summary index, the data must be assumed correct to give it credibility. This assumption has been justified in the past because the index has proven to have a remarkable correlation to the overall economy. When using this index, it is trend direction which is important – not necessarily the value when the index is above -0.7, the historical boundary between expansion and contraction.