Chicago Fed: Economic Activity Slowed In November

by: Doug Short

According to the Chicago Fed National Activity Index, in November economic activity decreased, and the current level remains below its historical trend. Here are excerpts from the report:

The index's three-month moving average, CFNAI-MA3, remained level, at -0.24, from October to November. November's CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. Likewise, the economic slack reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.

Production-related indicators made a contribution of -0.23 to the index in November -- a sharp decrease from +0.16 in October and its lowest value since April 2011. Industrial production edged down 0.2 percent in November after increasing 0.7 percent in the previous month. Manufacturing production decreased 0.4 percent in November after increasing 0.5 percent in October. The sales, orders, and inventories category made a neutral contribution to the index in November, down slightly from +0.01 in October. [Download PDF News Release]

The Chicago Fed's National Activity Index (CFNAI) is a monthly indicator designed to gauge overall economic activity and related inflationary pressure. It is a composite of 85 monthly indicators as explained in this background PDF file on the Chicago Fed's website. The index is constructed so that the historical index average is zero. Postive monthly values indicate above-average growth, negative values indicate below-average growth.

The first chart below is based on the complete CFNAI historical series dating from March 1967. The red dots show the indicator itself, which is quite noisy, and the 3-month moving average (CFNAI-MA3), which is more useful as an indicator of coincident economic activity. I've also highlighted official recessions.

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For a clearer look at the recent behavior of the index, here is a closeup view since 2007.

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The next chart highlights the -0.7 level. The Chicago Fed explains:

When the CFNAI-MA3 value moves below -0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. Conversely, when the CFNAI-MA3 value moves above -0.70 following a period of economic contraction, there is an increasing likelihood that a recession has ended.

With the exception of the 1973-75 recession, the -0.7 level has coincided fairly closely with recession boundaries. The 1973-75 event was perhaps an outlier because of the rapid rise of inflation following the 1973 Oil Embargo. Otherwise a cross below the -0.7 level has synchronized within a month or two of a recession start. A cross above the level has lagged recession ends by 2-4 months.

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The next chart includes an overlay of GDP, which reinforces the accuracy of the CFNAI as an indicator of coincident economic activity.

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Here's a chart of the CFNAI without the MA3 overlay — for the purpose of highlighting the high inter-month volatility. Consider: the index has ranged from a high 2.57 to a low of -4.78 with a average monthly change of 0.59. That's 8% of the entire index range!

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Further underscoring the volatility is the roller-coaster list of CFNAI monthly headlines from 2010 forward:

Increased Sharply (January 2010)

Slowed (February 2010)

Improved (March 2010)

Continued to Improve (April 2010)

Continued to Expand (May 2010)

Declined (June 2010)

Rebounded (July 2010)

Weakened (August 2010)

Slowed Further (September 2010)

Picked Up (October 2010)

Slowed (November 2010)

Improved (December 2010)

Slower (January 2011)

Near Average (February 2011)

Improved (March 2011)

Weakened (April 2011)

Remained Below Average (May 2011)

Again Below Average (June 2011)

Improved (July 2011)

Weakened (August 2011)

Improved (September 2011)

Up Slightly (October 2011)

Decreased (November 2011)

As the monthly chart depicts and the headline verbs reinforce, it's unwise to read very much in the data for any specific month. The 3-month moving average is the number to watch.

The Long-Term Economic Trend

In the final chart I've let Excel draw a linear regression through the CFNAI data series. The slope confirms the casual impression of the previous charts that National Activity, as a function of the 85 indicators in the index, has been declining since its inception in the late 1960s, a trend that roughly coincides with the transition from manufacturing to a post-industrial economy in the information age.

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