CFNAI: Coincident Indices Declining

Newsflash: Coincident Indicators are falling.  Coincident indexes are a rear view mirror of economic activity.  They are important as they are generally based on real data – and the future can be loosely forecast using trend lines.

The super coincident index – Chicago Fed National Activity Index (CFNAI) – fell sharply in April 2011.  This is a break in the positive trend lines – indicating a SLOWING of economic growth.  It is NOT indicating an impending recession.

The reasons:

Employment-related indicators made a contribution of +0.06 to the index in April, down from +0.24 in March. Private payrolls increased by 268,000 in April after rising by 231,000 in the previous month. However, the unemployment rate edged up to 9.0 percent in April from 8.8 percent in March, and average weekly initial unemployment insurance claims increased by nearly 40,000 in April.

The sales, orders, and inventories category also made a small positive contribution to the index in March; its contribution was +0.04, down from +0.15 in March.  The consumption and housing category contributed –0.39 to the index for the second consecutive month. Housing starts declined to 523,000 annualized units in April from 585,000 in March, and building permits decreased to 551,000 annualized units in April from 574,000 in the previous month.

Thirty-seven of the 85 individual indicators made positive contributions to the index in April, while 48 made negative contributions.

The large drop in the CFNAI three month moving average is not unusual – and last occurred in August 2010.

This slowing of the rate of growth should be taken to the bank.  The coincident indicator (blue line in the graph below) from ECRI also is trending down.

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 June 2011 economic forecast next week,  and preliminary data continues to indicate a cycle peak with the growth rate stable.

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.

Econintersect’s economic forecast for April predicted a peaking economy.  The May forecast is the same.

Related Articles:

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)