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Chicago Fed: Economic Growth Improved Again in January

Courtesy of Doug Short.

According to the Chicago Fed National Activity Index, in January economic activity decreased from December, but remained positive for the second consecutive month — the first time that has happened in twelve months. Here are excerpts from the report:

The index’s three-month moving average, CFNAI-MA3, increased from +0.06 in December to +0.14 in January, reaching its highest level since March 2011. January’s CFNAI-MA3 suggests that growth in national economic activity was slightly above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests limited inflationary pressure from economic activity over the coming year.

Employment-related indicators made a contribution of +0.35 to the index in January, up from +0.28 in December. Civilian employment rose by 0.6 percent in January, following a smaller increase of 0.1 percent in the previous month. Likewise, the unemployment rate decreased to 8.3 percent in January from 8.5 percent in December. [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.

 

 

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

 

 

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 monthly headlines from 2010 forward.

2010

2011

2012

Increased Sharply (Jan)
Slowed (Feb)
Improved (Mar)
Continued to Improve (Apr)
Continued to Expand (May)
Declined (Jun)
Rebounded (Jul)
Weakened (Aug)
Slowed Further (Sep)
Picked Up (Oct)
Slowed (Nov)
Improved (Dec)
Slower (Jan)
Near Average (Feb)
Improved (Mar)
Weakened (Apr)
Remained Below Average (May)
Again Below Average (Jun)
Improved (Jul)
Weakened (Aug)
Improved (Sep)
Up Slightly (Oct)
Decreased (Nov)
Improved (Dec)
Again Above Average (Jan)

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 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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