U.S. economic momentum weakened in August, according to today’s update of the Chicago Fed National Activity Index (CFNAI), a weighted average of 85 indicators. But the weakness fell short of signaling that a recession started, a warning that requires a reading of -0.70 or below for the CFNAI’s three-month moving average. As of August, the index’s three-month average is -0.47, down from -0.27 in July. There's weakness in the trend, but it's not yet fatal.
Nonetheless, CFNAI’s decline isn’t easily dismissed these days. As the Chicago Fed advises in a press release today, the three-month reading for August is the “lowest level since June 2011 and its sixth consecutive reading below zero. August’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend.”
It’s been clear for several months that economic growth overall, while still positive, has retreated a bit recently, as noted in last week’s review of a broad range of leading and coincident indicators that comprise the Capital Spectator Economic Trend Index (CS-ETI). The in-house benchmark can be thought of as an early read on CFNAI's changes. In any case, the broad profile of macro data via CS-ETI implies that a recession didn’t begin last month. Why? There were too many indicators still trending positive (primarily on a year-over-year basis) to make a strong case that the cycle had slipped over the edge in August.
But the full set of August numbers isn’t yet complete, and there's the revision risk to consider. In addition, on Thursday we’ll learn how durable goods orders fared last month, and Friday brings word of personal income and spending for August. The consensus outlook via Briefing.com expects more weakness in durable goods while income and spending will continue to post moderate gains for August, according to economic forecasts. Once these numbers are released, I’ll post an update of my GDP nowcast for this year’s third quarter. The government’s first official estimate of Q3 GDP arrives on October 26. Meantime, my current nowcast for Q3 GDP is roughly 1.9%, or slightly above the current official estimate for Q2. A key issue for the week ahead: how will Friday’s income and spending numbers change the nowcast? Stay tuned.
The bigger question is where September’s data is headed in general? The major indicators for this month don’t start arriving until next week. But as today’s CFNAI news suggests, it’s getting harder to dismiss the idea that we may be at or near the tipping point for the economy. If the recent weakness extends into September on a broad basis, that would be a distressing sign. Even so, it’s going to take several weeks at a minimum before we can confidently distinguish between what may be noise vs. a clear sign that economic weakness will extend into the rest of the year. For now, the jury’s still out, although the case for optimism has deteriorated a bit in the last several weeks.
Yes, it may be put-up-or-shut-up time. As I've been discussing for months, the case for arguing that a recession had recently started or was imminent has looked overbaked, based on the numbers (see this post from June 2012, for instance, which reviews a precursor index to CS-ETI). Three months on, it's somewhat less compelling to maintain the same level of optimism. But it's still premature to argue that a new recession is fate, even though the trend isn't necessarily improving at this point. In any case, deeper perspective is coming as the updates roll in.