December Economic Activity Improved, Chicago Fed Reports

Yesterday’s news that the Chicago Fed National Activity Index (CFNAI) increased last month provides another data point to consider in the debate about recession risk. Looking backward doesn’t necessarily tell us what’s coming, but it’s clear that December’s economic momentum strengthened. January and beyond, of course, are still open to interpretation.


“Led by improvements in production- and employment-related indicators, the Chicago Fed National Activity Index increased to +0.17 in December from –0.46 in November,” according to an accompanying statement. “The index’s three-month moving average, CFNAI-MA3, increased from –0.19 in November to –0.08 in December—its highest value since March 2011.”
CFNAI is a weighted average of 85 indicators of U.S. economic activity. The Chicago Fed recommends reading its 3-month moving average (CFNAI-MA3) as follows: a value below -0.70 after a period of economic expansion “indicates an increasing likelihood that a recession has begun.” By that standard, the December CFNAI-MA3 reading of -0.08 suggests that another downturn was nowhere in sight last month.

That’s no assurance that the coming months won’t deteriorate. There are, as if we needed reminding, plenty of risk scenarios out there that might derail the still-fragile recovery. As I keep mentioning, the weak personal income and spending numbers are high on my list of potential trouble spots. Perhaps we’ll learn if this worry is relevant or not when the December update arrives on Monday (Jan. 30).
There’s also Europe to consider and the potential for economic blowback as the Continent struggles to keep its own recession risk at bay. The U.K., meantime, has its own problems as it “moves closer to a second recession as economy shrinks 0.2%.”
Let’s not forget that the festering troubles with Iran may wreak havoc on the global economy. With the European Union set to impose economic sanctions on Iran for its nuclear program, the Iranian parliament is threatening to halt oil exports to Europe. There’s no sign of panic in oil trading, at least not yet. But if this crisis rolls on, the possibility for substantially higher energy prices can’t be ruled out.
Perhaps the economic outlook isn’t as rosy as it appears by looking solely at the data in the rear view mirror. It wouldn’t be the first time that focusing on recent history blinds us to what’s coming. The problem, of course, is that modeling the future is challenging, to say the least.
If the U.S. does slip into a new recession sometime in the near term because of an exogenous shock from Europe, Iran, or some unknown unknown, does that count as a win for the recession forecasters? We all know that there’s always another recession lurking in the future. The timing and specific catalysts are usually the great mysteries. As such, should there be a time limit on recession forecasts? Every prediction of is accurate… eventually.
Correction: The next personal spending & income update is for December and is scheduled for release on Monday, Jan. 30. An earlier version of this article incorrectly listed the release date.

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