May Chicago Fed National Activity Index

National output appears to have slowed in May 2015 according to the Federal Reserve Bank of Chicago’s National Activity Index.  This comprehensive indicator, which is comprised of 85 components, shows the rate of change in May was below trend.  While the reading remained below zero (the trend line) for the fifth consecutive month, it actually improved versus April’s revised tally of -0.19 (originally -0.15) and currently sits at -0.17.  It has not deteriorated enough to think the economy is contracting; output is just moving forward at a slower pace than has been the recent norm.

Labor market data kept the CFNAI indicator from being worse in May; this segment of the economy was the only positive contributor to the indicator.  Production remained negative in the period but was less so than in April.  Data on consumption and housing suggest some slowing in these portions of output.  Sales, orders, and inventories made a neutral contribution after being slightly negative a month earlier.

Changes in the various components were mixed.  Of the indicator’s 85 parts, 35 made positive contributions to the total, and 50 subtracted from the count.  However, some comfort can be taken since 43 components improved and only 41 deteriorated; one was unchanged.

Atlas pays most attention to the three-month moving average of this indicator because it tends to give clues about recessions or increasing pressures on inflation.  The three-month average of the headline tally improved a bit to -0.16 versus an upwardly revised count in April of -0.20 (originally -0.23), and while it remained negative, this trend is not low enough to cause concerns about a contraction.  Instead, this measure simply reveals that the economy is moving slower than its recent trend.  In part, this indicator helps inform an argument for why the Federal Reserve will wait until next year before increasing overnight interest rates; the economy is running below trend and signs of dangerous inflation levels are absent.       (by C. Cox)