December 2018 CFNAI Super Index Moving Average Improved?

Econintersect considers the CFNAI one of the better single metrics to gauge the real economic activity for the U.S. - and puts the entire month's economic releases into their proper perspective, although it is almost a month after the fact. It correlates well and historically has lead GDP. Note that the CFNAI is updated monthly and within 30 days of period close. GDP is released quarterly so lags the CFNAI by up to three months.

As the CFNAI is a summary index, the data must be assumed correct to give it credibility. This assumption has been justified in the past because the index has proven to have a good correlation to the overall economy. When using this index, it is trend direction which is important - not necessarily the value when the index is above -0.7, the historical boundary between expansion and contraction.

Caveats on the Use of the Chicago Fed National Activity Index

The index is quite noisy, and the only way to view the data is to use the 3 month moving average. As this index is never set in concrete, each month a good portion (usually from January 2001 onwards) of the data is backwardly revised slightly. The most significant revision is in the data released in the last six months due to revisions of the 85 indices which are embodied into the CFNAI.

Even the 3 month moving average has over time significant backward revision. This is due both to changing methodology and backward revisions of this index's data sources. This point is important as the authors of this index have stated that -0.7 value is the separation between economic expansion and contraction. The graph below shows the difference between the original published index values and the values of the index as of August 2011.

This index seems to continuously creep - and when using this index in real time, Econintersect would assume the index values when first released could easily be off in a range +0.2 to -0.2 as the data in the future will be continuously revised. However, there are times when the uncertainty in real time can be much larger. For seven consecutive months in the Great Recession, backward revisions ranged from -0.7 to -0.9. In such times of severe economic stress, the CFNAI has little real-time accuracy, although it still definitely was showing that the economy was bad. It simply did not reflect exactly how bad in real time.

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