Chicago Fed: Economic Growth Slowed In May

economyDoug Short:   ”Index shows Economic Growth Slowed in May.” 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) fell to –0.51 in May from +0.05 in April. All four broad categories of indicators that make up the index decreased from April, and all four categories made negative contributions to the index in May.

The index’s three-month moving average, CFNAI-MA3, decreased to –0.36 in May from –0.25 in April. May’s CFNAI-MA3 suggests that growth in national economic activity was somewhat below its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.

The CFNAI Diffusion Index, which is also a three-month moving average, moved down to –0.30 in May from –0.23 in April. Twenty-eight of the 85 individual indicators made positive contributions to the CFNAI in May, while 57 made negative contributions. Twenty-eight indicators improved from April to May, while 56 indicators deteriorated and one was unchanged. Of the indicators that improved, 12 made negative contributions. [Download PDF News Release]

The previous month’s CFNAI was revised downward from 0.10 to 0.05.

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.

CFNAI since 2000

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

CFNAI

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. The 1973-75 event was an outlier because of the rapid rise of inflation following the 1973 Oil Embargo. As for the other six, we see that all but one started when the CFNAI-MA3 was above the -0.70 level.

CFNAI and Recessions

The next chart includes an overlay of GDP, which reinforces the accuracy of the CFNAI as an indicator of coincident economic activity.

CFNAI and GDP

Here’s a chart of the CFNAI without the MA3 overlay — for the purpose of highlighting the high inter-month volatility.

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