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CFNAI: Improved But Still Weak

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    June 26, 2013

    Today’s chart of the day is the Chicago Federal Reserve National Activity Index (CFNAI).  I just recently penned an article about why this particular index, which is often dismissed, is probably the “most important economic number.”  I wrote previously that:

    “The Chicago Fed National Activity Index is a composite index made up of 85 sub-components which gives a broad overview of overall economic activity in the U.S. As Russ states ignoring the CFNAI could be a mistake.  Unlike backward-looking statistics like GDP, the CFNAI is a forward looking metric that gives some indication of how the economy is likely to look in the coming months.

    The overall index is broken down into four major sub-categories which cover:

    • Production & Income
    • Employment, Unemployment & Hours
    • Personal Consumption & Housing
    • Sales, Orders & Inventories

    The correlation between the CFNAI sub-components and the underlying major economic reports do show [chart below] some very high correlations. This is why, even though this indicator gets very little attention, it is very representative of the broader economy.”

    The predictive capability of the CFNAI, while very volatile on an annual rate of return basis, can tell us much about the overall strength of the economy.  Currently, the CFNAI is not confirming the mainstream view of an “economic soft patch” that will give way to a stronger recovery by year end. The latest CFNAI report, while improved somewhat at the headline from -.52 in April to -.30 in May, has remained negative for 3 months straight.



    The chart below, which shows the CFNAI index as compared to its 3-month average, has turned sharply lower and is threatening to violate levels that are just shy of recessionary territory.


    Lastly, the diffusion index of the 85 subcomponents also plunged in the latest month from -.08 in April to -.35 in May.  This suggests that the next reading of the CFNAI in June will likely be weaker than it is currently.  The chart below shows the diffusion index and the key level of -.20. Historically, such levels have been fairly indicative of weak economic growth or worse.


    This last statement is key to our ongoing premise of weaker than anticipated economic growth despite the Federal Reserve’s ongoing liquidity operations. We have discussed many times previously that the current trend of the various economic data points, on a broad scale, are not showing indications of stronger economic growth but rather a continuation of a sub-par“muddle through” scenario of the last three years.

    While this is not the end of the world, economically speaking, such weak levels of economic growth do not support stronger employment, higher wages or justify the markets rapidly rising valuations.  The most recent downturn in the markets is a reflection of the realization of the ongoing weakness in the earnings and economic data.  Weaker levels of economic growth will continue to weigh on corporate earnings.  Importantly, both sets of data currently reflect peaks for the post-recession economic recovery cycle.

    We said previously that:

    “The reality is that either the economic data is about to take a sharp turn for the positive or the market is set up for a rather large disappointment when the expected earnings growth in the coming quarters doesn’t appear.  From all of the research that I have done as of late, it is the latter that seems the most likely of outcomes as there does not seem to be a driver, currently, for the former. Maybe the real question is why we aren’t paying closer attention to what this indicator has to tell us?”

    It appears that we should have done just that.

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Host of Streettalk Live

    lance robertsAfter having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

    Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.