The Chicago Federal Reserve National Activity Index and Steel Supply.

“Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) rose to +0.47 in September from –0.25 in August. Three of the four broad categories of indicators that make up the index made positive con­tributions to the index in September, and three of the four categories increased from August.

The index’s three-month moving average, CFNAI-MA3, increased to +0.25 in September from +0.16 in August, marking its seventh consecutive reading above zero. September’s CFNAI-MA3 suggests that growth in national economic activity was somewhat 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.

The CFNAI Diffusion Index, which is also a three-month moving average, increased to +0.24 in September from +0.18 in August. Fifty-eight of the 85 individual indicators made positive contributions to the CFNAI in September, while 27 made negative contributions. Fifty-six indicators improved from August to September, while 29 indicators deteriorated. Of the indi­cators that improved, 12 made negative contributions.”

Production-related indicators made a contribution of +0.30 to the CFNAI in September, up from –0.20 in August. Industrial produc­tion rose 1.0 percent in September after decreasing 0.2 percent in August, and manufacturing capacity utilization increased to 77.3 per­cent in September from 77.1 percent in the previous month.

Employment-related indicators contributed +0.22 to the CFNAI in September, up from +0.04 in August. The unemployment rate declined to 5.9 percent in September from 6.1 percent in August; and non-farm payrolls increased by 248,000 in September, up from a gain of 180,000 in August. The contribution of the sales, orders, and inventories category to the CFNAI rose to +0.08 in September from –0.01 in August.

The contribution of the consumption and housing category to the CFNAI decreased to –0.13 in September from –0.09 in August. Consumption indicators, on balance, deteriorated, pushing the category’s contribution lower. However, housing starts rose to 1,017,000 annualized units in September from 957,000 in August, and housing permits edged up to 1,018,000 annualized units in September from 1,003,000 in the previous month.

The CFNAI was constructed using data available as of October 21, 2014. At that time, September data for 50 of the 85 indicators had been published. For all missing data, estimates were used in con­structing the index. The August monthly index was revised to –0.25 from an initial estimate of –0.21, and the July monthly index was revised to +0.52 from last month’s estimate of +0.26. 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 revisions to both the August and July monthly indexes were due primarily to the latter. End of statement.

Figure 1 shows the three month moving average of the CFNAI through September. There has been an erratic though sustained improvement since mid-2012. By this measure the economy is expanding faster than its historical trend.

Figure 2 shows the trends of the four main sub-components. The only negative of these four at present continues to be personal consumption and housing which has been gradually improving since Q2 2009.

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. Steel demand is closing the gap but is still below the CFNAI benchmark. We believe this delayed response to be a measure of the extent to which construction, (or lack there-of) is still a drag on steel demand. The good news is that steel supply has been accelerating in the last few months, the bad news as we have reported elsewhere is that imports have taken most or all of that improvement.

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.