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The Chicago Fed National Activity Index: Improved in March

Courtesy of Doug Short

Here’s the lead from today’s The Chicago Fed National Activity Index (CFNAI) release for March.
The index’s three-month moving average, CFNAI-MA3, edged down to +0.20 in March from +0.27 in February, but remained positive for the third consecutive month for the first time since May 2010. March’s CFNAI-MA3 suggests that growth in national economic activity was somewhat above its historical trend. With regard to inflation, the CFNAI-MA3 suggests limited inflationary pressure from economic activity over the coming year.

Production-related indicators made a contribution of +0.39 to the index in March, up from +0.11 in February. Total industrial production rose 0.8 percent in March after increasing 0.1 percent in February. In addition, manufacturing capacity utilization increased to 75.3 percent in March from 74.9 percent in February. Also in March, the Institute for Supply Management’s Manufacturing Purchasing Managers’ Production Index reached its highest level since January 2004.
[Download 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 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 a indicator of coincident economic activity. I’ve also highlighted official recessions.

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.

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

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!

Further underscoring the volatility is the roller-coaster list of CFNAI headlines over the past several months.

  • 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 (Marcy 2011)

As 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 the late 1960s. I’m reluctant to draw any conclusions from the slope, but suffice to say that it coincides with the transition from manufacturing to a post-industrial economy in the information age.

The next Chicago Fed Activity Index release is scheduled for May 23, 2011.


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