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Predicting an Expanding Economy
By Mel Miller

Second in a series of economic updates focused on key economic indicators.

I continue my quest to identify new recession predictors with the goal of improving forecast accuracy. I learned of a relatively new indicator named the Chicago National Activity Index (CFNAI) several years ago and now rely heavily on it as one of my forecast indicators. Constructed by the Federal Reserve Bank of Chicago, this index is released on a monthly basis. Its start date is March of 2001, with the data presented back to March 1967.

The index name is somewhat misleading. It is designed to test the health of the national, not the regional, economy. The index is a weighted average of 85 indicators of national economic activity 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 indicates that the economy is expanding at its historical trend rate of growth. Negative values indicate below-average growth, and positive values indicate above-average growth.

Monitoring the index on a monthly basis can be frustrating due to the monthly volatility. A better measure is the three month moving average (CFNAI-MA3) because it is less volatile and based on more complete data.

How to Interpret the Data

A three month moving average below -0.7 indicates the chance of a recession has risen substantially. A result of above 0.2 signals the recession is over. If the indicator rises above 0.7 more than two years into a recovery, it indicates inflationary pressures are accelerating. A reading of 1 or higher is a clear indication that a sustained period of rising inflation is on the near-term horizon.

The latest reading was -0.03 and a rising trend. This index is predicting that the economy will expand at slightly below the long-term average without any inflationary pressure.

The graph also shows the magnitude of the Great Recession and how far back the economy has come from that dark period. From an economic standpoint, an expanding economy with low inflation is about as good as it can get!

First Affirmative understands that the ways we save, spend, and invest can dramatically influence both the fabric and consciousness of society. We believe that in addition to the benefits of ownership, investors bear responsibility for the impact our money has in the world. Are you making conscious decisions about the impact of your consumer purchase and investment decisions?

NOTE: The CFNAI is not an index available for investment.

Posted: December 3, 2013