Monday, June 28, 2010

The Chicago Fed National Activity Index: The Economy Has Been Tested Positive For Contracting Recovery

What is this Chicago Fed National Activity Index(CFNAI) and what does it tell about the economy?  This index reflects the performance of 85 monthly national indicators drawn from four categories:
1) production and income
2) the job market and hours worked
3) personal consumption and housing
4) sales, inventories and orders

How does one go about interpreting the index?
A value of 0 means that the economy is growing at potential and inflation pressures are steady.  Greater than > 0 and demand outstrips supply and we see inflation pressures flare up.  Less than < 0 and the economy is growing below potential which can lead to rising unemployment.

The Chicago Fed National Activity Index was released today with the 3-month moving average reading 0.28.  What does that mean exactly?

First of all we like to look at the CFNAI-MA3 (3-month moving average CFNAI) because it is less volatile than the month-to-month value and revisions in the data have already been incorporated.  The following have been observed:

< -.7 = chance of recession has risen substantially
< -1.5 = in a recession
> 0.2 = recession likely over
> 0.7 = inflation is in danger of accelerating

A reading of 0.28 therefore implies:
0.2 < 0.28 < 0.7
Which in words means that the recession is likely over and the economy is in no danger of inflation.

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