Chicago Fed National Activity Index. What is it and how important is it?

Lets try to make this nice and simple. I’ll be honest. I have been following economic indicators since my college days and for some unknown reason, I have not come across this indicator. This is no ordinary economic indicator either. The Chicago Fed National Activity Index (CFNAI) is released monthly and is the weighted average of 85 economic indicators of economic activity. Do not confuse this with the Gross Domestic Product (GDP). The GDP is more of an adding principal where we count how much is produced in the United States in any given period. Instead, the CFNAI gives us an overall measure of how the economy is doing as a whole. However, if we look through at the GDP and CFNAI over the long term, we can see a strong correlation(relationship) where they follow similar economic patterns.

The four main categories in which the CFNAI is made of are: 1.)production and income, 2.) employment, unemployment and hours, 3.)personal consumption and housing and 4.)sales, orders, and inventories. When it comes to reading the CFNAI, it is quite simple. chicagofed-chart

Take a look at the graph above. is the recently released(March 20, 2017) version of the CFNAI. Since the 1970s, the graph has been fluctuating above, below or close to 0. If the graph is close to or at 0, then it means the economy is growing at just the right rate. During this time, the economy tends to have low unemployment rate, steady inflation, people are spending with confidence and sales are steady. If graph is negative, the economy is growing below trend growth. Which means the economy could be suffering from growing unemployment, low spending, slowed production, low orders and sales. It could signify the start of a recession. Lastly, if the graph shows a positive sign, then it means just the opposite. Remember, an economy can sometimes grow too fast for what it can actually maintain. In that case, the many people can see hard times fall on them when the economy does a hard pullback to get back at normal growing levels.

Since the CFNAI releases their measurement of the economy every month, it tends to be more volatile because since the data used to create the CFNAI is also volatile. This lead to the CFNAI-MA3 which is the three month moving average of the CFNAI. If we compare both graphs below(provided by FRED), we can see the difference in volatile between the two. You will also notice that the CFNAI-MA3 is great at indicating expansions and contractions of the economy.

fredgraph

fredgraph (1)

So, do you think this is good enough of an indicator that you would like to keep track of? I do. From now on I suppose. This indicator gives us a better sense of where the economy is going in the future since it has so accurate at displaying past economic recessions and expansions. Why not take advantage of such beautiful data/ graphs?

If you would like to learn more or just read up on past economic data of the CFNAI, please visit https://www.chicagofed.org/.

Special thanks to the FRED, the Federal Reserve Bank of St. Louis, for providing these graphs as well. Please visit their site check out their site at https://fred.stlouisfed.org/ and check out all the work they have done including their amazing economic graphs.

 

 

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