Here's What This Morning's Weak Chicago Fed Number Tells Us About Friday's GDP Report

Foreword: The Chicago Fed National Activity Index has an excellent record for signaling the economic downturns the associated with negative GDP and recessions. A decline in its 3-month moving average (MA) below the -0.7 level raises a warning that a recession may have begun. The latest update shows the fourth month of negative decline in the 3-month MA. The latest level of -0.33 for the 3-MA is still above the warning level. Here’s the lead from today’s CFNAI release for September.“Led by declines in production-related indicators, the Chicago Fed National Activity Index decreased to -0.58 in September from -0.49 in August. Three of the four broad categories of indicators that make up the index slightly improved from August, but only the sales, orders, and inventories category made a positive contribution to the index in September.” 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 latest Chicago Fed release 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 synchronised 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 merits 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!


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 it seems worth mentioning.


In light of the ongoing double-dip recession debate, the behaviour of this indicator over the next few months will be especially interesting.

The next Chicago Fed Activity Index release is scheduled for November 22. I’ll update these charts shortly after the release is published.


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