After surging to its highest level since November 2014, the CFNAI fell back -0.26 in May. Despite the roll-back, the three month moving average (3MMA), remained positive (0.04). Only one of the four sub-indexes that make up the headline index made a positive contribution in May. Sales, orders and inventories category made a contribution of 0.02 to the CFNAI in May, up from -0.01 in May. Its 3MMA was neutral (0.00).
The Chicago Fed National Activity Index is a coincident indicator of broad economic activity. The index is a weighted average of 85 indicators of national economic activity. A zero value for the CFNAI has been associated with the national economy expanding at its historical trend (average) rate of growth; negative values with below-average growth (in standard deviation units); and positive values with above-average growth.
Figure 1 shows the 3MMA of the CFNAI from 2006 to present. The CFNAI has now been in positive territory for five months of the last six months.
Figure 2 shows the four sub-indexes in the overall CFNAI, these include: Production and Income, Employment, Unemployment and Hours, Sales Order and Inventory and Personal Consumption and Housing.
Employment related indicators contributed -0.2 points to the index as nonfarm payrolls rose by only 138,000. This was the first negative contribution after a string of eight consecutive months of either neutral or positive postings. The sales, orders and inventories category had a positive reading in May of +0.02, up from its contribution of -0.01 in April.
The personal housing and consumption category continued its streak of 125 months of negative contributions (-0.09), to the CFNAI as housing starts recorded a disappointing 1.092 million (annualized), in May down from Aprils’ 1.156M. National Association of Realtors Chief Economist Lawrence Yun has said, homes are selling “extremely fast” with few options from which to choose. It is definitely a seller’s market right now, pushing up median prices. Economists continue to expect better housing starts in the second half of 2017, likely hitting 1.25 million units at the annual rate. The good news is that the slower activity appears to be as a result of labor and supply-chain issues rather than slowing demand.
Production and Income contracted by -0.16 points in May. This category has historically shown wild swings from month to month. Its 3MMA was 0.07, down from last month’s 0.14.
The Conference Board’s Leading Economic Index (LEI), reported that new manufacturing orders increased 0.3% in May. Other positive input arose from lower weekly unemployment claims, increased consumer confidence, higher stock prices and solid overall lending conditions. On the downside, reduced building permits subtracted from the headline LEI in May.
In summary although the CFNAI revealed below-average economic activity in May, both the 3MMA and 6MMA, (which eliminate month over month volatility) remained in expansionary territory.
At Gerdau we follow the CFNAI on a monthly basis since it is one of the broadest measures of the health of the US economy. A healthy and expanding US general economy correlates well to stronger steel consumption.