August Chicago Fed National Activity Index

Economic growth slowed in August according to the Chicago Fed National Activity Index (CFNAI), a monthly report filed by that branch of the Federal Reserve System.  Falling from July’s downwardly revised 0.26 (originally 0.39), the indicator fell below zero for the first time since January 2014 to -0.21 in August.  Monthly numbers for this indicator can be volatile, so Atlas pays more attention to the three-month average which remained slightly above zero (0.07); any reading above zero suggests output is still growing faster than the historical trend.

Internally, there was a marginally negative bias to the components.  Forty-two of the indicators improved from July to August while forty-three deteriorated.   Forty-five of the 85 made positive contributions to the tally, and 40 subtracted from the total.  Of the indicators that improved, 12 continued to subtract from the headline number but did so to a lesser degree than a month earlier.

Production related components made the biggest impact on the monthly change. This portion of the economy subtracted 0.17 after adding 0.24 a month earlier.  In particular, manufacturing dropped 0.4 percent in August after increasing 0.7 percent in July; part of this can be attributed to capacity utilization declining from 77.6 percent to 77.2 percent in August.

Atlas sees this CFNAI release as additional evidence that the central bank will be very slow to raise overnight interest rates.  Our economy is currently growing very close to the slow trend it has experienced during the recovery.  Per the Federal Reserve Bank of Chicago’s release, they are expecting limited inflation from economic activity over the next 12 months.  In other words, America’s economy is not overheating.  This should allow the central bank to be very measured as it decides what to do with overnight interest rates.  Even if the zero interest rate policy disappears, these central planners are likely to move very slowly with any subsequent interest rate hikes.            (by C. Cox)