The Chicago Fed National Activity Index (CFNAI) for June rose modestly, suggesting that recession risk eased. Although the 3-month moving average of the index increased to -0.20 last month from -0.38 in May, the June number was the fourth straight month of below-zero readings, which “suggests that growth in national economic activity was below its historical trend,” the Chicago Fed reports.
The view that the U.S. economy has weakened in recent months is old news at this point. But the idea that recession risk remains relatively low as of June is likely to be greeted with far more skepticism. Nonetheless, the 3-month moving average of the CFNAI has an encouraging record of signaling the arrival of new recessions, albeit with a slight lag. The trigger point for identifying a new period of economic contraction is when the 3-month average of CFNAI drops below -0.7. By that standard, the current -0.38 still affords a decent if not huge cushion between current conditions (as of last month) and another recession.
Economic reports are subject to revisions, of course, and that means CFNAI will be revised too. But reviewing vintage data for CFNAI (i.e., the original data as reported, before revisions) still paints an encouraging picture for this benchmark as an early warning indicator that the U.S. economy has recently slipped into a downturn that will eventually be labeled as a recession by the National Bureau of Economic Research. For example, the first recessionary reading for the 3-month CFNAI was published on March 24, 2008. Many months later, NBER declared that the Great Recession began in January 2008.
Readers of these pages will hardly be shocked to learn that the CFNAI data doesn’t show that the economy had tipped over into recession as of June. Earlier this month, I made the same argument based on a review of 15 economic and financial indicators. The Philadelphia Fed’s ADS Business Conditions Index offers additional statistical support for arguing that recession risk has remained low in recent history.
The future may tell us differently, but the econometric analysis is quite clear in the here and now: the U.S. economy was recession-free as of last month. That’s not a forecast; rather, it’s simply interpreting the numbers overall in a statistical framework informed by the business cycle’s history.
Qualitatively, there’s much to criticize when it comes to current economic conditions. There are also plenty of risks lurking as well. No one should consider the empirical fact (based on the numbers in hand) that the U.S. managed to skirt a recession through June 2012 as a sign that all’s well. It’s not.
Barring a massive round of data revisions in the weeks and months ahead, however, the case for thinking that the U.S. dodged a macro bullet through the past month just got a bit stronger with today’s CFNAI update. The burning question now becomes: Will July be able to hold out too? The numbers so far suggest that the forces of darkness may be getting stronger. But the jury’s out until more data arrives. Yes, the mystery of the business cycle for July will soon be resolved, one way or another, one economic update at a time.