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Chicago Fed Index (CFNAI) Looking Ominous!

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    November 28, 2012

    Each month the Chicago Federal Reserve releases the latest readings of its National Activity Index (CFNAI), which it has compiled since 1967.  The financial media, and therefore investors, pay little attention to it.

    They should pay more attention.

    The index is a weighted average of 85 indicators of economic activity the Fed draws from the four broad categories of: production and income; employment, unemployment, and employee hours; personal consumption and housing; and sales, orders, and inventories.

    A positive number indicates that national economic growth is above trend, while a negative number indicates growth is below trend.

    The monthly number had been in negative territory in 5 of the previous 6 months before improving to the flat-line at 0.0 in September.

    But unfortunately it was reported yesterday that it unexpectedly returned to negative territory with a sizable drop to –0.56 in October.

    Of more interest, its 3-month moving average also dropped to –0.56 in October from -0.36 in September. That is getting very close to the level of –0.70 that the Chicago Fed says it considers “an increasing likelihood that a recession has begun”

    It was its 8th straight month of negative readings for the 3-month m.a. It is the solid line in the following Fed chart of the CFNAI. Note how its long-time accuracy repeated when it dropped below –0.70 in 2000, and in 2008, with the 2002 recession and 2008-2009 ‘Great Recession’ soon following.

    And in 2003 when it dropped exactly to 0.7 but not below, and the slowing economy slowed no further but began to recover.

    CFNAI graph



    I believe from a quick perusal of its history that the only previous times besides 2001 and 2008 that the 3-week m.a. reached and exceeded –0.70 were in 1970, 1974, 1980, 1982 and 1991. Those were all recession and bear market years too.

    To check the data yourself you can click here ;  CFNAI Current Data – Federal Reserve Bank of Chicago The column you’re looking for in the table the link takes you to is the one with the heading CFNAI –MA3.

    By the way, this is a chart I lifted from my book Beat the Market the Easy Way! which shows what the stock market looked like 1965 to 1983, which encompassed the years 1970, 1974, 1980, and 1982.


    The other year mentioned, 1991, when the CFNAI dropped below –0.70, was the year of the 1991 recession and bear market. And then there was 2001, and 2008 shown in the Fed’s chart at the top of the post.

    So I don’t understand why investors don’t pay more attention to the CFNAI Index.

    Has correction ended or not?

    The global rally off the June low ran out of steam in September, but global markets bounced back with big rallies last week.

    Did it mark the end of the correction, or was it only a brief bounce off the short-term oversold condition?




    We believe our technical indicators (not shown) have the answer.

    A big thank-you to:

    Timer Digest for our ranking of #2 Long-Term Stock Market Timer in their current issue!

    RestlessBoomers.com for featuring my article about ‘defensive stocks’ on their website. 

    Subscribers to Street Smart Report: There will be an in-depth “Markets Signals and Recommendations’  update tomorrow in your secure area of the Street Smart Report website.

    Images: Flickr (licence attribution)

    About The Author

    Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!