The Chicago Federal Reserve National Activity Index (CFNAI) and Steel Supply

The index’s three-month moving average, CFNAI-MA3, decreased to +0.10 in January from +0.26 in December, marking its fifth consecutive reading above zero. January’s CFNAI-MA3 suggests that growth in national economic activity was above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests limited inflationary pressure from economic activity over the coming year (Figure 1).

Forty-one of the 85 individual indicators made positive contributions to the CFNAI in January, while 44 made negative contributions. Of the indicators that improved, ten made negative contributions. Production-related indicators contributed –0.36 to the CFNAI in January, down from +0.06 in December. Manufacturing output decreased 0.8 percent in January after rising 0.3 percent in December, and manufacturing capacity utilization decreased to 76.0 percent in January from 76.7 percent in the previous month.

Employment-related indicators contributed +0.13 to the CFNAI in January, up from +0.06 in December. The unemployment rate decreased to 6.6 percent in January from 6.7 percent in December, while nonfarm payrolls increased by 113,000 in January after rising by 75,000 in the previous month.

The contribution from the sales, orders, and inventories category to the CFNAI increased to +0.02 in January from –0.01 in December.  The contribution from the consumption and housing category to the CFNAI moved down to –0.18 in January from –0.14 in December. Housing starts declined to 880,000 annualized units in January from 1,048,000 in December, and housing permits declined to 937,000 annualized units in January from 991,000 in the previous month (Figure 2).

The CFNAI was constructed using data available as of February 20, 2014. At that time, January data for 51 of the 85 indicators had been published. For all missing data, estimates were used in constructing the index. The December monthly index was revised to –0.03 from an initial estimate of +0.16. Revisions to the monthly index can be attributed to two main factors: revisions in previously published data and differences between the estimates of previously unavailable data and subsequently published data. The revision to the December monthly index was due primarily to the latter.”

Figure 3 shows that the CFNAI has historically been a reasonably accurate leading indicator of steel demand (apparent supply) with a lead time of about six months. This is one of several benchmark indicator that shows steel demand has not recovered to its traditional level since the recession. We believe this to be a measure of the extent to which construction, (or lack there-of) is still a drag on steel demand. 

Explanation: The index is a weighted average of 85 indicators of national economic activity 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. When the CFNAI-MA3, (three month moving average) value moves below –0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. Conversely, when the CFNAI-MA3 value moves above –0.70 following a period of economic contraction, there is an increasing likelihood that a recession has ended. 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.