The pace of U.S. economic growth improved in June. The CFNAI scored 0.13, rebounding nicely from a negative 0.30 in May. On a three month moving average (3MMA), the CFNAI stayed in expansionary territory, (+0.06). Three of the four sub-indexes that make up the headline index made a positive contribution in June. Sales, orders and inventories category made a positive contribution of 0.02 to the CFNAI in June, up from -0.01 in June. Its 3MMA was slightly negative at -0.04.
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 three of the last six months, alternating one month negative, the next month positive.
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 0.06 point to the index as nonfarm payrolls rose by 222,000, 185,000 in the private sector. 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 (126 months), of negative contributions to the CFNAI, (-0.04). Housing starts rebounded to 1.215 million (annualized), in June up from May’s 1.092M. Stronger June building permits indicate higher future housing starts. A stronger housing market coupled with increased consumer spending should shift this sub-index into positive territory in the near future. Production and Income advanced 0.09 points in June. This category has historically shown wild swings from month to month. Its 3MMA was 0.12, up nicely from last month’s 0.03 and its third consecutive monthly increase.
Manufacturing output rose a little in June, however the outlook for industrial production was mixed. Auto production posted improved results in June, yet vehicle sales are declining as pent-up demand has largely been satisfied. Bankers are pulling-back on subprime lending which will hurt future sales. Manufacturing outside of automobile production has a more robust outlook. Mining and energy are expected to continue to post gains. The shale industry has figured out how to reduce its break-even point by reducing costs and extracting more oil from fewer wells. New home construction will continue to expand as demand improves with the strengthening economy. Construction is expected to continue to add workers in order to meet the increased demand.
Overall the June CFNAI report was positive, projecting an promising near term 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.