The pace of U.S. economic growth slowed slightly in July, falling back to -0.01 from 0.16 in June. Three of the four sub-categories that make up the index declined from the prior month, and three made a negative contribution to the overall index. On a three month moving average (3MMA), the CFNAI fell into negative territory, (-0.05). Employment, unemployment and hours was the lone category to make a positive contribution, (+0.09) to the CFNAI in July, up from a score of +0.13 in June. Its 3MMA was positive at 0.05.
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 2010 to present. The CFNAI has been in positive territory for three of the last six months.
Figure 2 shows the four sub-indexes of the overall CFNAI, these include: Production and Income, Employment, Unemployment and Hours, Sales Order and Inventory and Personal Consumption and Housing. Nonfarm payrolls rose by 209,000 in July as the employment sub-index continues to perform well. Job growth is averaging about 180,000 per month. Approximately 100,000 are required to keep up with growth in the working-age population, so 80,000 or so per month are reducing the unemployed. This situation cannot be sustained over the long-term and will put upward pressure on wages. This sub-component of the CFNAI has been positive for 10 of the past 12 months.
The personal housing and consumption category continued its streak (127 months), of negative contributions to the CFNAI, (-0.06 in July). Housing starts fell to 1.155 million (annualized), in July up from July’s 1.215M. However, July building permits were stronger indicating higher future housing starts. A stronger housing market coupled with increased consumer spending is anticipated to shift this sub-index into positive territory in the near future.
Production and Income fell 0.02 points in July. This category has historically shown wild swings from month to month. Its 3MMA was negative 0.06, down sharply from last months +0.11, its first decline after three consecutive monthly increases.
The CFNAI has struggled to put together greater than two consecutive months of positive readings since late 2014. Since the CFNAI is often volatile from month to month, the index’s three-month moving average is important to keep an eye on. The CFNAI’s three-month moving average fell into negative territory for the first time in four months. Despite this, the overall July CFNAI report was positive, projecting an encouraging short range outlook.
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.