"Index suggests economic growth increased in October." This is the headline for this morning's release of the Chicago Fed's National Activity Index, and here is the opening paragraph from the report:

Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to +0.83 in October from +0.32 in September. Three of the four broad categories of indicators used to construct the index made positive contributions in October, and three of the four categories increased from September. The index’s three-month moving average, CFNAI-MA3, fell to +0.75 in October from +1.37 in September. [Download report]

Background on the CFNAI

The Chicago Fed's National Activity Index (CFNAI) is a monthly indicator designed to gauge overall economic activity and related inflationary pressure. It is a composite of 85 monthly indicators as explained in this background PDF file on the Chicago Fed's website. The index is constructed so 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.

The first chart below shows the recent behavior of the index since 2007. The red dots show the indicator itself, which is quite noisy, together with the 3-month moving average (CFNAI-MA3), which is more useful as an indicator of the actual trend for coincident economic activity.

For a broad historical context, here is the complete CFNAI historical series dating from March 1967.

The next chart highlights the -0.7 level. The Chicago Fed explains:

When the CFNAI-MA3 value moves below -0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. Conversely, when the CFNAI-MA3 value moves above -0.70 following a period of economic contraction, there is an increasing likelihood that a recession has ended.

The next chart includes an overlay of GDP, which reinforces the accuracy of the CFNAI as an indicator of coincident economic activity.

Here's a chart of the CFNAI without the MA3 overlay — for the purpose of highlighting the high inter-month volatility.

Further underscoring the volatility is the roller-coaster list of CFNAI monthly headlines from 2017 forward.

(Click on image to enlarge)