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The Chicago Fed's National Activity Index, reported Tuesday for the month of January, moderated to a mark reflecting slower economic growth than reported for December. The index declined to a still positive +0.22, down from +0.54 in December, reflecting the generally soft feel of economic data since the turn of the year.

The Chicago Federal Reserve's metric of economic activity takes tally of 85 separate indicators measuring four broad categories of economic health. The report looks at data points measuring production and income, employment, unemployment and hours, personal consumption and housing, and sales, orders and inventories. The index compares economic growth to historic rates of activity. A reading of -0.7 or lower has been found to indicate that recession is underway.

While the index remained in the positive and well above the threshold for recession, its moderation is important. The big ship of the U.S. economy takes time to turn, as I've noted in years past. It slows before it stops, and it takes significant force or its own exhaustion to slow it, as it has an intrinsic forward momentum.

In my opinion, the slowing pace of economic growth indicated by the Chicago Fed measure should be noted before the absolute positive figure is celebrated. This is especially true because of the segment supporting this month's index most, employment, which is a traditionally lagging indicator. Employment related indicators made a 0.35 contribution to the index in January, versus the 0.28 contribution in December.

An important positive we should not exclude from the discussion is the fact that December was revised higher, to 0.54, from the initially reported mark of 0.17. This had a strong impact upon the three-month moving average as well, moving it into the positive for both the last two months. December's three-month average gained to 0.06, from the initially reported mark of -0.08. January's three-month moving average came in at 0.14. However, I suspect there's a good chance January might see similar estimate changes, though to the negative end. Of the 85 indicators the Chicago Fed looks at, 36 were estimated for this month's measurement, and will face revision next month.

What troubled me most was what happened in production, where the contribution was hedged to 0.11, down from 0.54 in December. Manufacturing production growth was down to 0.7% from 1.5% growth in December, and industrial production was unchanged while it was 1.0% higher in December. Some might say maintenance at a few plant operators could be affecting the data here a bit, but I think the problem is more closely tied to the recession occurring in Europe, and U.S. exports into the softening market. The Vanguard Industrials ETF (NYSEARCA:VIS) is up roughly 35% since its October 3, 2011, trough. Of course, much of these gains have been on the strength in housing stocks, which we recently questioned.

Also, with gasoline high and rising, it threatens to cut off U.S. consumption heading into spring and summer, especially if there is an Iran disturbance. The contribution to the index from consumption and housing indicators was -0.27, up from the -0.3 marked in December, but still negative. The sales, orders and inventories segment contribution was a non factor this month, similarly to last month.

Looking at the charts the Chicago Fed includes in the report, it is obvious that the U.S> economy has experienced significantly less robustness coming out of the last recession than in other cycles of the past. Obviously, that is due to the depth of the last recession and the significant weights against recovery, including the housing overhang, the degree of layoffs marked plus a profoundly changed labor environment, and the structural changes to the finance industry, both due to the scars of the past and due to regulation. Meanwhile, the global interconnection of markets, while offering support in recent years, is now costing us, at least from Europe. Chinese growth is also slackening, and may be dragging more than has been reported.

The charts also show that this indicator typically turns lower before recession occurs, and so the index shifting back toward zero this month is at least worth considering. However, while it's up from last fall, it also finds a receptive bullish audience that is happy about that result. I attribute the gains from last fall to the creative value added in consumer segments, especially retail, but we've seen since the holidays that much of those gains were on a company specific basis. In aggregate, the consumer discretionary space is not outperforming on an operational basis, based on retail sales data, and so I recently issued a call for investors to sell the fattened retail trade industry stocks in aggregate.

That said, I think we will continue to see varied performance in the individual retailer stocks as they report now. The SPDR S&P Retail ETF (NYSEARCA:XRT) is up 31% since its October 3, 2011 trough. Individual retailers are separating themselves again this week, with the gains of Macy's (NYSE:M) and Home Depot (NYSE:HD) contrasting against declines at Barnes & Noble (NYSE:BKS), Steve Madden (NASDAQ:SHOO) and surprisingly, Wal-Mart (NYSE:WMT), on Tuesday's varied earnings data.

As for the economy, and supported by this latest barometer, I reiterate that the ugly truth is leaking out. Thus the 25% gain in the SPDR S&P 500 Index (NYSEARCA:SPY) since October 3, 2011, is also looking at risk to me now. I am looking for a slow-growth-conditioned and vulnerable U.S. economy to find trouble making headway against the tide of Europe and global activity, and the potential torpedo of Iran.

Source: An Economic Early Warning Sign Flashes