Monday, November 23, 2009

The Latest Manufacturing Recovery News... The National Activity Index

Today's article is about the Chicago Federal Reserve's National Activity Index. By understanding this index, you can get a clearer picture of the overall economy and sharpen the "crystal ball" in order to make better decisions. This index looks at numerous indicators, not just the "best one" or the "worst one". You can't pick the best indicator and tell everyone the economy has sprung back, nor can someone pick the worst (pessimistic) one and tell everyone that the sky is falling!!

The Chicago Fed National Activity Index was –1.08 in October, down very slightly from –1.01 in September. A decline in the contribution of production and income indicators offset small improvements in the other three broad categories of indicators that make up the index.

So what exactly is the National Activity Index?

The index is a weighted average of 85 indicators of national economic activity. The indicators are drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories.

A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

What do the Numbers Mean??

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. 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.

Production Indicators

Production-related indicators-with a contribution of -0.07 in October compared with +0.23 in September - made a negative contribution to the index for the first time since June 2009. Much of the decline in this category's contribution can be attributed to lower manufacturing production. In particular, durable goods manufacturing declined 0.4 percent in October after rising 1.1 percent in September. Partially offsetting this was an increase in the Institute for Supply Management's Manufacturing Purchasing Managers' Production Index. It increased to 63.3 in October from 55.7 in the previous month.

Employment -Related Indicators

Employment-related indicators made a contribution of –0.46 to the index in October versus –0.60 in September. Payroll employment decreased by 190,000 in October after declining by 219,000 in September. Household employment also declined at a slower pace in October. However, the unemployment rate increased to 10.2 percent in October from 9.8 percent in September.

The Consumption and Housing Indicators

The consumption and housing category’s contribution to the index increased to –0.52 in October, following a contribution of –0.61 in September. Small gains in a number of consumption indicators accounted for much of the increase. In contrast, housing starts were lower in October at an annual rate of 529,000 units compared with 592,000 units in September.

The Sales, Orders, and Inventories Indicators

The sales, orders, and inventories category also improved in October, contributing –0.02, compared with –0.04 in September.

So What Does This All Mean??

The index's three-month moving average, CFNAI-MA3, decreased to -0.91 in October from -0.67 in September, declining for the first time in 2009. October's CFNAI-MA3 suggests that growth in national economic activitiy remained below its historical trend. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 indicates low inflationary pressure from economic activity over the coming year.

Basically - the expansion that we saw in July through September finally levelled off and Inflation will be held in check for now.

This probably is no surprise to anyone, there will be ups and downs during our recovery. Appears that we will muddle along for a little while longer, but there have been good signs for all.

For the complete report from the Chicago Federal Reserve, click here.


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