Chicago Fed: Economic Growth Moderated In October [Dow Jones Industrial Average 2 Minute, SPDR S&P 500 ETF Trust]

dataDoug Short: “Index shows economic growth moderated in October”: This is the headline for today’s release of the Chicago Fed’s National Activity Index, and here are the opening paragraphs from the report: 

Led by declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) moved down to +0.14 in October from +0.29 in September. Two of the four broad categories of indicators that make up the index decreased from September, and two of the four categories made negative contributions to the index in October.

The index’s three-month moving average, CFNAI-MA3, declined to –0.01 in October from +0.12 in September. October’s CFNAI-MA3 suggests that growth in national economic activity was near 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.

The CFNAI Diffusion Index, which is also a three-month moving average, decreased to +0.11 in October from +0.16 in September. Forty-nine of the 85 individual indicators made positive contributions to the CFNAI in October, while 36 made negative contributions. Thirty-six indica- tors improved from September to October, while 49 indicators deteriorated. Of the indicators that improved, seven made negative contributions. [Download PDF News Release]

The previous month’s CFNAI was revised downward from 0.47 to 0.29. Investing.com was looking for a headline reading of 0.40.

Background on the CFNAI

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 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.

The first chart below shows the recent behavior of the index since 2007. The red dots show the indicator itself, which is quite noisy, together with the 3-month moving average (CFNAI-MA3), which is more useful as an indicator of the actual trend for coincident economic activity. I’ve added a high-low channel for the MA3 data since 2010. After hitting the top of the channel in April, it has slipped to the upper mid-range.

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For a broad historical context, here is the complete CFNAI historical series dating from March 1967.

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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.

The next chart highlights the -0.70 level and the value of the CFNAI-MA3 at the start of the seven recession that during the timeframe of this indicator.

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