The Federal Reserve Bank of Chicago National Activity Index, which is compiled on a monthly basis, is a weighted average of 85 indicators of national economic activity. These indicators are drawn from four broad categories of data, namely:
- production and income;
- employment, unemployment, and hours;
- personal consumption and housing; and
- 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.
Month-to-month movements can be volatile, so the index’s three-month moving average provides a more consistent picture of national economic growth. When the 3-month average value moves below –0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. Equally, when the 3-month 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.
In July 2011, the monthly index improved to a more helpful -0.06 from a revised -0.38 in June, while the 3-month number rose from -0.54 to -0.29. The latest data reading was better than the market expected (which was -0.48), and suggests that the US economy is not in recession, but growing below trend and clearly flirting with recession.
Production-related indicators made a contribution of +0.28 to the index in July, up sharply from +0.03 in June. Industrial production increased by 0.9%m/m in July after rising 0.4%m/m in June. Manufacturing production, particularly auto production, rebounded; and manufacturing capacity utilisation rose to 75.0% in July from 74.6% in the previous month.
Employment-related indicators contributed +0.05 to the index in July, an increase from -0.10 in June. Total non-farm payroll employment increased by 117 000 in July after edging up 46 000 in June; and the unemployment rate ticked down to 9.1% in July from 9.2% in the previous month.
The consumption and housing category also improved: its contribution to the index was -0.33 in July, up slightly from -0.34 in June.
The sales, orders, and inventories category was the only one to deteriorate in July. It contributed -0.06 to the index in July, down from +0.03 in June. The Institute for Supply Management’s Manufacturing Purchasing Managers’ New Orders Index declined to 49.2 in July, falling below 50 for the first time since June 2009.
Overall, 43 of the 85 individual indicators made positive contributions to the index in July, while 42 made negative contributions. The index was constructed using data available as of 18 August 2011. At that time, July data for 52 of the 85 indicators had been published. For all missing data, estimates were used in constructing the index.
In a number of recent economic presentations, We have discussed that US economic data for July has shown a clear improvement relative to the data recorded for May and June. Unfortunately, the few August data points which are already available (most notably University of Michigan consumer confidence and the Philadelphia Fed Index) have been shockingly weak; therefore the risk that the US economy returns to recession conditions remains high.
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