Chicago Fed Index Suggests Slower, But Still Above Average Growth in August

Led by some further moderation in the growth of production-related indicators, the Chicago Fed National Activity Index (CFNAI) declined to +0.79 in August from +2.54 in July. Two of the four broad categories of indicators used to construct the index made positive contributions in August, but all four categories decreased from July. The index’s three-month moving average, CFNAI-MA3, moved down to +3.05 in August from +4.23 in July.

The CFNAI Diffusion Index, which is also a three-month moving average, decreased to +0.62 in August from +0.73 in July. Forty-five of the 85 individual indicators made positive contributions to the CFNAI in August, while 40 made negative contributions. Twenty-nine indicators improved from July to August, while 56 indicators deteriorated. Of the indicators that improved, 11 made negative contributions.

Production-related indicators contributed +0.23 to the CFNAI in August, down from +1.26 in July. Industrial production increased 0.4% in August after rising 3.5% in July. The contribution of the sales, orders, and inventories category to the CFNAI moved down to –0.04 in August from +0.53 in July.

Employment-related indicators contributed +0.63 to the CFNAI in August, down slightly from +0.65 in July. Nonfarm payrolls moved up by 1.4 million in August after increasing by 1.7 million in July, but the unemployment rate fell by 1.8 percentage points in August after decreasing by 0.9 percentage points in the previous month. The contribution of the personal consumption and housing category to the CFNAI moved down to –0.04 in August from +0.09 in July. Housing starts decreased to 1,416,000 annualized units in August from 1,492,000 in the previous month.
The CFNAI was constructed using data available as of September 18, 2020. At that time, August data for 51 of the 85 indicators had been published. For all missing data, estimates were used in constructing the index. The July monthly index value was revised to +2.54 from an initial estimate of +1.18, and the June monthly index value was revised to +5.84 from last month’s estimate of +5.33. 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 July and June monthly index values were primarily due to the latter.

The CFNAI is a weighted average of 85 existing monthly indicators of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend.

The 85 economic indicators that are included in the CFNAI are drawn from four broad categories of data: production and income; employment, unemployment, and hours; personal consumption and housing; and sales, orders, and inventories. Each of these data series measures some aspect of overall macroeconomic activity. The derived index provides a single, summary measure of a factor common to these national economic data.

The CFNAI corresponds to the index of economic activity developed by James Stock of Harvard University and Mark Watson of Princeton University in an article, “Forecasting Inflation,” published in the Journal of Monetary Economics in 1999. The idea behind their approach is that there is some factor common to all of the various inflation indicators, and it is this common factor, or index, that is useful for predicting inflation. Research has found that the CFNAI provides a useful gauge on current and future economic activity and inflation in the U.S.