The Chicago Federal Reserve National Activity Index and Steel Supply

The index’s three-month moving average, CFNAI-MA3, decreased to -0.27 in March from -0.12 in February. March’s CFNAI-MA3 suggests that growth in national economic activity was some­what below its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.

The CFNAI Diffusion Index, which is also a three-month moving average, decreased to -0.09 in March from -0.02 in February. Thirty-eight of the 85 individual indicators made positive contributions to the CFNAI in March, while 47 made negative contributions. Thirty-seven indicators improved from February to March, while 48 indicators deteriorated. Of the indica­tors that improved, 14 made negative contributions.

Production-related indicators made a contribution of -0.27 to the CFNAI in March, down from -0.08 in February. Industrial produc­tion declined 0.6 percent in March after moving up 0.1 percent in February. The contribution of the sales, orders, and inventories category to the CFNAI was unchanged at +0.01 in March.

Employment-related indicators contributed -0.03 to the CFNAI in March, down from +0.11 in February. Non-farm payrolls increased by 126,000 in March, following a gain of 264,000 in the previous month. However, the unemployment rate was steady at 5.5 percent in March.

The contribution of the personal consumption and housing category to the CFNAI increased to -0.13 in March from -0.22 in February. Housing starts moved up to 926,000 annualized units in March from 908,000 in February. However, housing permits decreased to 1,039,000 annualized units in March from 1,102,000 in the previous month.

The CFNAI was constructed using data available as of April 16, 2015. At that time, March data for 50 of the 85 indicators had been pub­lished. For all missing data, estimates were used in constructing the index. The February monthly index was revised to -0.18 from an initial estimate of -0.11. 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 February monthly index was due primarily to the former.

Figure 1 shows our analysis of the 3MMA of the CFNAI through March. There was an erratic though sustained improvement from mid-2012 to November last year but the index has declined every month since then. In the last two months, February and March the 3MMA of the index has been negative, meaning that the economy is expanding at less than its historical trend which is represented by the zero line, (see explanation below). The March result was negative 0.42 with a 3MMA of negative 0.27.

Figure 2 shows the trends of the four main sub-components. The sub-component “Production and Income” gained strongly in November but has since collapsed. The employment component has also been declining since November but is still doing better than the long term trend. Personal consumption and housing continue to be a drag.

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. SMU monitors several benchmark indicators to evaluate whether steel consumption is where it should be based on historical patterns. This is the first of those benchmarks to suggest that steel has closed the gap that developed after the recession. We believe this delayed response to be a measure of the extent to which construction has been a drag on steel demand. 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.

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