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.
A reading of zero is historical trend growth, a reading above zero is faster and below zero is slower growth.
ReplyDeleteI'd bet large sums of money that we don't average zero going forward, lol. Sigh.
Stagflationary Mark,
ReplyDeleteThe 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.
Here's a chart with a 10-year moving trend.
ReplyDeleteGrinding to a Halt
Stagflationary Mark,
ReplyDeleteI 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!
Here's a solution.
ReplyDeleteA 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!