Chicago Fed National Activity Index Up Via Backward Revision

The Chicago Fed National Activity Index (CFNAI) showed a slight decrease in monthly activity in February 2011 but the important 3 month moving average edged higher on the back of significant backward revision for the second month in a row.

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.  The headlines for February:

The index’s three-month moving average, CFNAI-MA3, increased to +0.11 in February from +0.05 in January, coming in positive for two consecutive months for the first time since April and May of 2010. February’s CFNAI-MA3 suggests that growth in national economic activity was slightly above its historical trend. With regard to inflation, the CFNAI-MA3 indicates limited inflationary pressure from economic activity over the coming year.

Employment-related indicators made a contribution of +0.30 to the index in February, up from +0.06 in January. Total nonfarm payroll employment rose by 192,000 in February after increasing by 63,000 in January. Also in February, the unemployment rate edged lower to 8.9 percent, and average weekly initial unemployment insurance claims declined below 400,000 for the first time since June 2008.

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.  The CFNAI is now telling us the economy likely did improve in January.

Econintersect’s economic forecast for February predicted a slightly improving economy.  The March forecast is also for an improving economy.

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