FTR Blog | Interpreting the Chicago Fed National Activity Index

02.05.16 | FTR and

The Federal Reserve Bank of Chicago puts out a very useful piece of information each month. It is called the Chicago Fed National Activity Index (CFNAI) and it is a great barometer of overall health of the United States. One of the main reasons why it is such a useful item is because it aggregates 85 monthly indicators into a single metric. Everyone’s time is severely limited these days and keeping track of hundreds of different economic data isn’t on most people’s minds (unless you’re an economic data geek like us here at FTR!).

The first time you see the index numbers they don’t make much sense, but if you allow me to give you a brief introduction to it I believe that you will find it a very useful addition to your monthly economic updates.

The index is derived to show you if the economy is growing at trend, or above or below it. That means that an index reading near zero does not mean that there is no growth, but rather that the growth we are seeing is near the economy’s expected trend potential (that would be about 3% during a normal recovery). If the figure is below -0.7 it indicates a strong potential for recession (during the last recession it bottomed out near a reading of -4.0). A figure above +0.7 indicates that the economy may be overheating and would signal a strong potential for increased inflation.

Because monthly economic data is very volatile you will often see it quoted as an average of the last 3 months index (CFNAI-MA3) - this helps smooth out the data and makes it easier to see the trend. The index remained in negative territory for December but increased a small amount from November. It hit -0.22 for December and the 3 month average was -0.24. The negative numbers indicate that growth in national economic activity was below its historical trend. The 2.0% growth seen in Q3 bears this out.

You can see in the graph above that, aside from 2010 and 2014, the index has generally stayed at or just below the zero mark - again, this jives with the 2.2% average GDP growth seen during this recovery - growth that is below the historical trend but still staying quite positive.

The CFNAI is a quick and easy view of the economy. I would suggest adding it to your list of must-see data each month - and removing some others - leaving you more time to focus on your true business needs.

View January 2016 Chicago Fed National Activity Index: cfnai-january2016-pdf