Chicago Fed Nat’l Activity Index: November 2012 Preview

Is the U.S. economy sinking into a new recession? Or has another downturn already started? Tomorrow’s November update of the Chicago Fed National Activity Index (CFNAI) may provide a quantitative answer. In the October reading, CFNAI’s three-month moving average slipped to -0.56, the closest to the red line of -0.70 since the Great Recession ended. A fall below -0.70 would be considered a sign of an “increasing likelihood that a recession has begun,” according to the Chicago Fed. No one can dismiss the risk, but The Capital Spectator’s average econometric forecast anticipates a rebound that moves CFNAI’s 3-month average away from the brink: -0.26, or up from -0.56 in October.


Here’s how the numbers stack up, followed by brief definitions of the methodologies behind The Capital Spectator’s projections:
122012A1.GIF
VAR-4: A vector autoregression model that analyzes four economic time series in search of interdependent relationships through history. The forecasts are run in R with the “vars” package using historical data for the following indicators: the Chicago Fed National Activity Index (3-month averages), the Capital Spectator Economic Trend Index (3-month averages), the Philadelphia Fed US Leading Indicator, and the Philadelphia Fed US Coincident Economic Activity Indicator.
VAR-5: A second VAR model (see overview above) uses five indicators: the Chicago Fed National Activity Index (3-month averages), US private payrolls, real personal income less current transfer receipts, real personal consumption expenditures, and industrial production.
ARIMA: An autoregressive integrated moving average model that analyzes the historical record of CFNAI (3-month moving averages) in R via the “forecast” package.
ES: An exponential smoothing model that analyzes the historical record of CFNAI (3-month moving averages) in R via the “forecast” package.

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