Monday, September 24, 2012

CFNAI Yellow Alert

The Chicago Fed National Activity Index is a composite index built from 85 monthly indicators. A reading of zero is historical trend growth, a reading above zero is faster and below zero is slower growth.

source: http://www.chicagofed.org/webpages/research/data/cfnai/current_data.cfm

The Chicago Fed background document states that a reading above +0.7 indicates inflation danger and below -0.7 indicates recession danger. In a 2012 Chicago Fed Letter, Scott Brave and Max Lichtenstein found that:
the crossing of a -0.35 threshold by the CFNAI Difusion Index signaled an increased likelihood of the beginning (from above) and end of a recession (from below). This threshold was determined using the Berge and Jord a ROC method. Additionally, Brave and Lichtenstein found that, on average, the CFNAI Difusion Index signals the beginning and end of recessions one month earlier than the CFNAI-MA3.
The reading for August was -0.87 and the three month moving average was -0.47. These readings are flashing a recession warning.

The trends are equally discouraging. The August index was the 6th monthly negative reading in a row, and the 4th negative three month moving average reading in a row. The last time that happened (from a general positive trend) was October 2007, two months before the last official recession started.

5 comments:

  1. A reading of zero is historical trend growth, a reading above zero is faster and below zero is slower growth.

    I'd bet large sums of money that we don't average zero going forward, lol. Sigh.

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  2. Stagflationary Mark,

    The trend doesn't look promising. Six months of consecutive negative readings doesn't look like a shallow dip into the red. Maybe we'll have a strong reading next month, who knows?

    I also don't get any comfort from the fact that the EU is putting off dealing with Greece until after the US election. There will be a lot of shoes to drop between November and February.

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  3. Stagflationary Mark,

    I saw your chart and was going to comment on your site about it. The long term trend is worse, much worse. The index almost begs to be redefined in a way that makes it much less ugly.

    Maybe some components can be seasonally adjusted, birth-deathed, or subjected to a partial survey. Ben save us!

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  4. Here's a solution.

    A reading of zero is historical trend growth, a reading above zero is faster and below zero is slower growth.

    If we redefine historical to be only those things that happened in the last few nanoseconds, then I think we can get this index back to something extremely close to zero.

    Bill: Did you see the CFNAI index yesterday?
    Frank: I sure did! I've got a CFNAI twitter feed that updates me 10 times per second. The economy looks pretty stable now!

    Hahaha!

    ReplyDelete