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Understanding The CFNAI Components

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    December 24, 2013

    The Chicago Fed’s National Activity Index, which I reported on earlier today, is based on 85 economic indicators drawn from four broad categories of data:

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

    The complete list is available here in PDF format.

    In today’s Chicago Fed update, we learned that all four broad categories of indicators that make up the index increased from October, and three of the four categories made positive contributions to the index in November. — Personal Consumption and Housing being the negative outlier. Let’s now take a look at the historical context, focusing on the less volatile 3-month moving average of the components.

    A chart overlay of the complete 45-year span of all four categories, even if we use the three-month moving averages, is a bit challenging for visual clarity:

    So here is a close-up view since 2000:

    But a snapshot of the 21st century contains only two recessions, so it’s unclear how the individual components have behaved in during the seven recessions since the 1967 starting point for this data series.

    Here is a set of charts showing each of the four components since 1967. Because of the highly volatile nature of the data, the charts are based on three-month moving averages, a smoothing strategy favored by the Chicago Fed economists. I’ve also highlighted the values for the months that the NBER subsequently identified as recession starts.

    There’s a lot to digest in the individual charts. Clearly the first two (Production and Income and Employment, Unemployment and Hours) are the more volatile of the quartet. It is also obvious that Personal Consumption and Housing has been the biggest drag since the onset of the Great Recession. In fact, if I use the Excel default vertical axis (optimized for the data) rather than using the same vertical scale for all four components, the sustained lethargy of this CFNAI component is quite dramatic. We can readily see that it’s the chronic outlier in the quartet. The good news is that the trend has generally been on the mend since early 2011.

    I’ll close this dissection of the CFNAI components by reassembling them for a closer look at their collective 3-month moving averages since 2007.

    Check back next month for a close-up look at the latest trend directions.

    Images: Flickr (licence attribution)

    About The Author

    My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.

    My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.

    Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.

    Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool article attests.


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