Chicago Fed National Activity Index Slows

Inquiring minds are reading the Chicago Fed National Activity Report for February 2010.

Led by declines in production-related indicators, the Chicago Fed National Activity Index decreased to –0.64 in February, down from –0.04 in January.

Three of the four broad categories of indicators that make up the index deteriorated, and only the sales, orders, and inventories category made a positive contribution.

The index’s three-month moving average, CFNAI-MA3, decreased to –0.39 in February from –0.13 in January, but for the second consecutive month, it was higher than at any point since December 2007.

February’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 indicates low inflationary pressure from economic activity over the coming year.



Most of the weakness in the index continued to stem from the consumption and housing category. This category’s contribution to the index was –0.45 in February, down slightly from –0.44 in January. Housing starts decreased to 575,000 annualized units in February from 611,000 in January.

Employment-related indicators also made a negative contribution to the index, contributing –0.16 to the index in February compared with –0.02 in January. Payroll employment declined by 36,000 in February after decreasing by 26,000 in January, and average weekly hours worked in manufacturing declined to 40.3 in February from 40.7 in the previous month.

The sales, orders, and inventories category made a positive contribution to the index for the sixth consecutive month. This category contributed +0.05 in February, up from +0.02 in January.

Thirty-four of the 85 individual indicators made positive contributions to the index in February, while 51 made negative contributions. Forty indicators improved from February to January, while 45 indicators deteriorated. Of the indicators that improved, 20 made negative contributions.

What is the National Activity Index?

The index is a weighted average of 85 indicators of national economic activity. The indicators are drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories.

A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

What do the numbers mean?

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.

When the CFNAI-MA3 value moves above +0.70 more than two years into an economic expansion, there is an increasing likelihood that a period of sustained ncreasing inflation has begun.

The recession may be over but it will not take much to move the index towards a double-dip signal.

Expect weakness with spurts of activity driven by census hiring artifacts, inventory rebuilding, and waning stimulus effects.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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