The Chicago Fed’s National Activity Index (CFNAI) printed this week.  The CFNAI is among my favorite indicators that no one seems to follow (though it is covered monthly by Calculated Risk and usually David Rosenberg).  It is an amalgam of 85 distinct economic indicators that gives a very accurate read on the economy.  The folks in Chicago tell us to focus more on the three month moving average than the month-to-month number, and tell us further that, “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.”

So, where are we as of this month’s print?  Try -0.60, a mere 10 bps from what is likely recessionary terrain:

Source:  Chicago Fed. Red line denotes likely recession threshhold.

I’ll outsource the commentary to Rosie (while noting for the record that I’d Tweeted about this in advance of his piece, lest I be accused of appropriating his work):

Note that the worst we got last summer was -0.28 so indeed, this is a different “soft patch” and perhaps a more pernicious one than we experienced in last year’s “head fake.”  Also note that we hit -0.60 on the CFNAI index in January 2001 and March 2008, both times the major equity indices were off the highs but still close enough to be keeping the bull market psychology alive.  Only in December 1991 and in April 2003 did we slip to -0.60 and actually not slip into contraction mode in the real economy; however, the former was still very close to the prior recession so it wasn’t even clear at that point that it was over; the latter was all about the Iraq war and proved temporary.  It is debatable as to whether the similar move through -0.60 in July 1989 provided a false signal as it did lead the recession (again, a recession that nobody saw coming at the time) — at the very least it marked the nearing of the end for that long cycle of the 1980s and gave an early signal for investors to start trimming risk.

For the curious, next month’s print would have to be -1.09 to achieve a sum of -2.10 for three months (and hence a 3-mo ma of -0.70).  While a drop from this month’s -0.46 to a -1.09 is rather large for this index, it is in the realm of historical experience.  If I had to guess, I’d say we won’t hit the -0.70 three month moving average next month.  But we are in dangerous territory to be sure.

Oh, and for the inflationistas in the audience, there’s this from the Chicago Fed:

When the CFNAI-MA3 value moves above +0.70 more than two years into an economic expansion, there is an increasing likelihood that a period of sustained increasing inflation has begun.

Translation:  Don’t hold your breath.

Stay tuned.

Category: Data Analysis, Economy, Research

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5 Responses to “CFNAI — Toeing the Line”

  1. Ted Kavadas says:

    For those interested in the long-term trend of the CFNAI-3, I have found a certain long-term chart with annotations to be quite interesting. Although I posted it on my blog in September of last year, the trend to date appears to still be within the trendlines. Here is the blog post for those interested:

    Invictus: Thanks for that.

  2. FS says:

    From a trading/investing perspective how does this information fit? Do you short individual names or short indexes?
    Does this mean areas that are working (casino’s, energy–nat gas in particular) are no longer investable?

  3. Bokolis says:

    Given that this is a 3-mo MA chart, prehaps you can get the boys at the Chicago Fed to consider smooth lines.

    Invictus: My bad.

  4. [...] The economy is flirting with a recession according to this underrated indicator.  (Big Picture) [...]

  5. holden1176 says:

    The personal consumption and housing component has been weighing down the CFNAI like it never has before (or at least since 1968)