November 2011 CFNAI Super Index Remains Subdued

The November 2011 Chicago Fed National Activity Index (CFNAI) release shows the 3 month moving average of -0.24 (which is neither recessionary nor good). The index is higher than the levels one year ago, has been range bound for the last seven months, and the current level is indicative of subdued inflationary pressures.

The Chicago Fed National Activity Index (CFNAI) is Econintersect’s primary 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. However, this index may not be accurate in real time (see caveats below) – and it did miss the start of the 2007 recession.

Note that a zero value for the index indicates that the national economy is expanding at its historical trend rate of growth, and that a level below -0.7 would be indicating a recession was likely underway. Econintersect uses the three month trend because the index is very noisy (volatile).

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 eight months, the index has remained in a range between -0.14 and -0.30 except for June which was -0.53. 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:

Production-related indicators made a contribution of –0.23 to the index in November—a sharp decrease from +0.16 in October and its lowest value since April 2011. Industrial production edged down 0.2 percent in November after increasing 0.7 percent in the previous month.  Manufacturing production decreased 0.4 percent in November after increasing 0.5 percent in October. The sales, orders, and inventories category made a neutral contribution to the index in November, down slightly from +0.01 in October.

The contribution from the consumption and housing category to the index ticked up to –0.29 in November from –0.30 in October.  Housing starts rose to 685,000 annualized units in November from 627,000 in October. Similarly, housing permits increased to 681,000 annualized units from 644,000 over the same period.

The employment-related indicators’ contribution to the index was +0.14 in November, up from +0.01 in October. Payroll employment increased 120,000 in November after rising 100,000 in the previous month. Likewise, the unemployment rate dropped to 8.6 percent in November from 9.0 percent in October.

Thirty-four of the 85 individual indicators made positive contributions to the index in November, while 51 made negative contributions.

Thirty-one indicators improved from October to November, while 54 indicators deteriorated. Of the indicators that improved, 16 made negative contributions. The index was constructed using data available as of December 20, 2011. At that time, November data for 49 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 backward 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.  It correlates well to GDP.

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.

Caveats on the Use of the Chicago Fed National Activity Index

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 (usually from January 2001 onwards) of the data is backwardly revised slightly. The most significant revision is in the data released in the last six months due to revisions of the 85 indices which are embodied into the CFNAI.

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 when first released 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.

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Econintersect Economic Forecasts

Past CFNAI posts