The Chicago Fed National Activity Index (CFNAI), one of my favorite economic indicators, was released this morning, It's not widely followed, but I like the measure because it is a compilation by the Chicago Fed of 85 other monthly and quarterly data points. It is a very broad measure of national economic activity, divided into four basic areas: production and income, consumption and housing, employment and sales, orders and inventories.
Given the fact that the measures come from so many different parts of the economy and are measured on different scales, the CFNAI arranges the index metrics so that a value of zero indicates the economy is growing at about its trend rate of growth, or long term potential, of about 3% or so. And because the monthly figures are volatile (they bounce around a lot and can be revised significantly), the best measure to focus on is the three-month moving average, using the shorthand of CFNAI-MA3 for that metric.
Growth above zero s required if we are going to meaningfully reduce unemployment. Readings below zero, but above -0.70, mean the economy is growing below its potential. Readings below -0.70 indicate contraction and consistent readings below -0.70 generally indicate a recession.
The CFNAI-MA3 was 0.30 in February, up from 0.22 in January, the highest level since May 2010. The measure has improved each month since October 2011, when it was -0.16.
This metric is not forward looking. But we can look at some of the components to see where we are now. First,let's look at what the individual components of this index tell us. The monthly headline figure (remembering that, for the headline, the three-month moving average is a better measure) was -0.09, down from 0.33 in January. Two of the four broad categories of indicators that make up the index deteriorated from January, but of these two, only the production and income category made a negative contribution to the index in February.
Employment-related indicators contributed 0.18 to the index in February, down from 0.36 in January. The contribution from the consumption and housing category to the index was –0.27 in February, up slightly from –0.29 in January. The contribution from production-related indicators to the index declined to –0.01 in February from 0.30 in January. The contribution from the sales, orders and inventories category to the index increased, ticking up to 0.01 in February from -0.03 in January.
Employment is growing faster than the historical average, but isn't quite gangbusters. Consumers are spending money, but housing, though stable and generally improving, is still weak relative to history. Businesses are selling goods and services to consumers, businesses, governments and overseas customers at a growth rate near historical trend. None of these areas indicate any worries about the current situation and the positive readings in employment are encouraging, though perhaps not exciting.
The production and income component is the weakest link in the data, or is it? The metric dropped from 0.30 to -0.01 in the last month.
A big reason for the drop was the fact that industrial production was a big fat zero in February. I am not at all concerned. But many people have pointed to the headline drop in Industrial Production as some sort of problem – but it seems people haven't looked at the details of the report. This report includes manufacturing, utilities and mines (including oil and natural gas production). Unseasonably warm weather caused output at utilities to be flat after declining in the past couple months (on a seasonally-adjusted basis), and not surprisingly, energy drilling and extraction fell in tandem recently.
Of most interest is manufacturing, which expanded by 0.3% after two solid months of growth, coming in at 1.5% in December and 1.1% in January. And we can reasonably expect manufacturing to slow, as some of the activity has been related to inventory restocking, which is temporary by nature. So, a tapering off of the inventory build and warmer weather both showed up in soft production data.
When one considers these details, the Chicago Fed National Activity Index would be even stronger than it actually was. As such, given the fact that the economy, based on this measure, is growing faster than its long-term potential, I highly doubt that any further stimulus measures are -- or at least, should be -- forthcoming, given their ability to fuel inflation.