The pace of U.S. economic growth rebounded nicely in December as the CFNAI advanced to +0.25 from a -0.02 score in October. On a three month moving average, (3MMA) basis the CFNAI recorded a +0.42 reading, up a tick point month on month, (m/m). This was the third month in a row of positive readings on a 3MMA basis, (0.36, 0.43 and 0.42).
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.
On a monthly basis, three of the four sub-indexes were positive in December. The Production and Income sub-index posted a +0.25. Employment, unemployment and Hours scored a +0.01. Sales Orders and Inventory edged higher by +0.08. Personal Consumption and Housing sub-index recorded a -0.07.
Figure 1 shows the 3MMA of the CFNAI from 2010 to present. The CFNAI has been in positive territory for only five of the 12 months through December. The Personal Consumption and Housing sub-index continues to drag the overall index down. Note that the last three months, (highlighted bubble) exhibit the strongest performance since the second quarter of 2014.
Figure 2 shows the four sub-indexes of the overall CFNAI on a 3MMA basis. On a 3MMA evaluation, the Production and Income sub-index posted a +0.34. Production and Income has recorded three consecutive monthly gains, (0.22, 0.27 and 0.34). Employment, unemployment and Hours scored a +0.07. This sub-index has been in positive territory on 3MMA basis for 14 months. Sales Orders and Inventory moved higher by +0.06, making a string of seven months of gains. Personal Consumption and Housing sub-index recorded a -0.05. The personal housing and consumption category continued its streak, now at 131 months of negative contributions to the CFNAI going back all the way back to May 2007.
The weaker dollar is helping with stronger exports that are benefiting manufacturing production. The dollar took a beating in 2017, falling nearly 10%, while the stock market is posting daily records. Analysts are blaming the recent tax cut for the dollars swoon. The tax reform bill has equity investors excited about the windfall coming to shareholders, but it’s also expected to push the national debt beyond its current level of $20 Trillion. The result is that it’s driving up treasury yields and pushing the value of the dollar lower. As U.S. deficits rise, the country is forced to finance its debts by borrowing from other nations. That reduces the value of the dollar. In addition, globally the economic recovery is making bonds and equities in emerging markets with high-risk, high-reward potential more attractive.
Overall December’s CFNAI was an encouraging report.
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.