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.

Confirm and Disprove Stereotypes With The OECD Factbook 2010

When you want to have some fun with economics it's nice to check out the OECD Factbook 2010 as it is loaded with awesome facts about the world.

 Apparently the "growing demand for highly skilled workers has led to global competition for talent" in other words Koreans are the best at science :

Source: OECD Factbook 2010

Credit Card Debt Has Been Declining But...

it's not due to reasons we would like.  "Total Revolving Credit Outstanding" is a fancy way of referring to the total amount owed by all U.S. consumers on credit cards. As you can see the U.S. consumer has a lot less debt on their credit cards then when before the recession started.  Unfortunately it reflects a lot of people just straight up defaulting on their credit cards.

The WSJ Real Time Economics blog highlighted this fact when referencing Americas shrinking current-account deficit:

"The latest data on the deficit, though, suggest the decrease is as much a reflection of Americans’ insolvency as it is a sign of a return to financial and economic health."

This is the incredibly lame American way:

1. Amount hysterically large amounts of credit card debt (expecting things to never change like your job, income, marital situation, ect)
2. Once times are tough buckle under pressure and default.

What needs to occur is increased financial literacy and education to prevent people from borrowing with the attitude "the sky is the limit".  Maybe for Lil' Wayne it is but not for most people, as the recent dramatic drop in debt shows.  The really pathetic thing here is that if incomes and home prices continued to increase we would still see a rise in credit card debt and not a scramble by people to pay down their debts.  Since we saw the opposite; we see a drop in debt because an increasing segment of the population is unable to afford the minimal interest rate payments on their exploding debt so they are forced into default.

A Journey Through New Keynesian "Sticky-Wage" Theory

A decrease in aggregate demand leads to a reduction in some combination of wage rates, employment, and hours worked per employee.  It the demand for a firms output falls substantially, a firm must either reduce its employment, average weekly hours worked or average hourly wage rate.  Quit rates decline during recessions because few jobs are available at other firms.  The standard New Keynesian explanation tells us that when we experience a decline in aggregate demand firms will likely lay off employees and reduce average weekly hours worked rather than resort to a reduction in wage rates.  This is due to the employees strong resistance to wage cuts.  On our journey we will see various things that confirm and confront this theory.

First a look at average hourly earnings:

 Notice how wages go up in recessions? These wage increases are remarkable given how low our inflation has been.  Aren't wage increases supposed to increase inflation? To see if this relationship holds we must plot inflation and wages on the same graph.  We should see average hourly wages and inflation rise at the same time:

This relationship is strikingly dead on.  Except we do see that recent dip in the CPI which reflects how layoffs (or a decline in civilian employment) resulted in the drop in aggregate demand:

Another thing to note is average weekly hours worked.  According to the theory average weekly hours worked would decrease while employment started to decrease and vice-versa:

Unemployment insurance is also said to provide an incentive for firms to lay workers off rather than reducing their pay:

GDP Numbers Revised Downward

From the Bureau of Economic Analysis:

"Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.7 percent in the first quarter of 2010, (that is, from the fourth quarter to the first quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2009, real GDP increased 5.6 percent."

The 2.7% is a .3% revision downward from the "second" estimate and a .5% downward revision from the "advance" estimate.   

Double-Dip: Financial Conditions Index Shows Pre-Lehman Reading

Check this out.

May New Residential Sales Drop 32.7% From April

This is not a positive sign as it will probably lead to a further drop in construction of new homes.  300,000 new homes were sold in May which is a 32.7% drop from April's numbers.  For the Current Press Release.  It is now estimated that it will take 8.5 months for all new homes to sell given current inventory and sales, this is a significant jump from last months 5.8 months.  We have also seen a drop in the amount of homes for sale.  One possible explanation: depressed housing values and demand has led to home builders waiting for current inventory to clear and demand to pick up.  This is not good news for durable goods producers as it means depressed demand for all the things that usually go along with a new house.

Reactions to the data from WSJ can be found here.