Strong Recovery Signal from Chicago Fed

This graphic is from the 5-Min. Forecast (here).

This begs the question: Strong rebound to what? The FRB Chicago National Activity has rebounded to the area that is near the low for the previous two recessions. Does this mean that it is predicting the return to a level of GDP similar to the bottom of other recessions?

I would say, based on the data displayed, that what happens next for GDP will correlate to what happens next for the index. Duh!! If the index continues upward, the outlook for GDP is constructive. But, coming out of the last two recessions, the initial spike in the index was followed by backing and filling. GDP stayed below the index curve for the entire period shown except for 1998 1nd 1999. Thus, what we see thus far could be interpreted as consistent with a GDP growth rate in the range of 0 to 1%.

One factor worth mentioning is that the index turned up while GDP growth was still going down. The two previous recessions saw both turn up at the same time once a recovery was underway. In the 2001 recession, there was a double bottom in the index when the initial advance occurred while GDP growth continued down. Such an occurrence now would have much more draconian psychological impact than the small fluctuations in the 2001 recession.

Watch the relationship between Chicago Fed National Economic Activity Index and GDP growth closely. It is a most intriguing correlative relationship. The relationship is not tracking very exactly what has occurred in the two prior recessions. If there is no index decline in the coming months, a unique pattern will be established, differing from what occurred in 1990-91 and 2001.

Comments

[enigmaman:]

Looking at the chart it would appear that GDP trend is declining, each recession GDP recovery was preceded by a 50% decline in GDP after 5 years, the 95-99 bubble boosted GDP to above the norms, then a collapse of GDP, followed by 2-3 years of below average growth then another decline until the 08 bubble burst then another collapse from lower GDP highs , if it follows past GDP trends it will mean 5 years of erratic moves to lower highs and finally ending up 50% off its most recent 5 year high. To me it doesnt look good, like we will be less productive for at least the next five years with GDP below an average that is lower then past averages

Oct 08 08:06 AM

[Old Trader:]

"Thus, what we see thus far could be interpreted as consistent with a GDP growth rate in the range of 0 to 1%."

Ouch!!!! Given the market and various pundits have predicted 3-4% growth, and even the more bearish forcasters are looking something like 2%, if correct, this will lead to a LOT of "disappointment".

Oct 08 09:15 AM

[The Geoffster:]

"Bear in mind current conditions are closer to those that existed during the great depression than any time sense(sic)."
-Mish
globaleconomicanalysis...

Oct 08 10:00 AM

[bearfund:]

"Real GDP" suggests a proper adjustment for the declining value of the dollar. You're not going to get that from these guys. GDP growth is much overstated and will continue to be so.

Oct 08 10:40 AM

[Leftfield:]

I figure the evidence here is that we've "stabilized" at a lower rate of decline. And, this isn't a typical inventory-adjustment, post-WWII recession, so, who knows if these tea leaves are accurate this time.
Given the $trillions handed to Wall St., this indicator (black box to us) may be showing mostly artificial stock market recovery.

Oct 08 10:40 AM

[thiazole:]

I don't quite follow why we'd compare a 3 month metric to yoy GDP growth. Why not compare it to quarterly GDP growth? I think the relationship would be much more telling.

Oct 08 10:41 AM

[a fat panda:]

John, The unprecedented level of government intervention makes historical comparisons less meaningful.

The economy is stuck in a debt trap, where we issue debt which pulls demand forward. The cash for clunkers moved auto consumption from 2010 to 2009. Industry understands this, and they aren't going to hire knowing that demand will be slack in 2010. So you get a jobsless "recovery" that just becomes a long recession.

Oct 08 11:36 AM

[437339:]

Re

A Jobless recovery - Go Figure . I've read MANY recent commentaries stating ' that 80 % OF THE LOST JOBS AREN'T COMING BACK ". Ouch ! Want to know where the US economy is going ? Just look at Japan . But they were better off from the start of their downturn , as they EXPORTED huge amounts of products . ALSO , Their citizens were great savers . 20 years later from the Start of their real estate + stock market , credit bust , They have NOT recovered .

Oct 08 11:58 AM

[bricki:]

It's not a black box.

Here is how it's calculated:

www.chicagofed.org/eco...

And no, there is no stock market valuation dependency. It is rather based on production, employment and so on.

Actually looking at the components it looks pretty concrete.

On Oct 08 10:40 AM Leftfield wrote:

> I figure the evidence here is that we've "stabilized" at a lower
> rate of decline. And, this isn't a typical inventory-adjustment,
> post-WWII recession, so, who knows if these tea leaves are accurate
> this time.
> Given the $trillions handed to Wall St., this indicator (black box
> to us) may be showing mostly artificial stock market recovery.

Oct 08 10:42 PM

[Steven Hansen:]

John, the chicago fed's index includes non-gdp indexes. the NIPA total income would be a better fit.

we make our money - you and me - on non-gdp included items. as investors, gdp is a false god

Oct 09 01:42 AM

[RTC:]

A graph of CFNAI vs employment losses during recessions going back to 1970 is at:

web.cecs.pdx.edu/~rc/index.html#econ

under "Indications"

Oct 09 06:06 PM

[E Nuff Sed:]

Canadian unemployment has started to fall. To me its a good sign that the US economy will start turning as well. Canada as the largest trading partner and resource supplier to the US is a leading indicator to a US recovery.
seekingalpha.com/user/...

Oct 09 08:41 PM