The plot thickens for deciphering the next move for the business cycle… or does it? The Chicago Fed National Activity Index (CFNAI)—a broad measure of the U.S. economy—slipped last month. “Two of the four broad categories of indicators that make up the index deteriorated from January, but of these two, only the production and income category made a negative contribution to the index in February,” the Chicago Fed reports. On the other hand, monthly numbers are noisy, which is why we’re told to pay closer attention to CFNAI’s three-month moving average, which “suggests that growth in national economic activity was above its historical trend.”

Putting the index’s three-month average in historical perspective certainly perks up the case for thinking optimistically. Indeed, this average rose to 0.30 in February from 0.22 in January—the highest in two years. How should we read this information? The Chicago Fed advises that a value below -0.70 after a period of economic expansion “indicates an increasing likelihood that a recession has begun.” By that rule, the latest reading suggests that the economy will continue growing for the foreseeable future.

As usual these days, there’s lots of disagreement about what the future holds. Even the recent uptick in jobs creation hasn’t muffled worries about the business cycle. Yours truly is still concerned about the deceleration in personal disposable income. Back in November I wondered if slowing income growth would eventually bite us, and I’ve been watching this potential time bomb closely ever since, including the latest report. Alas, the same old concern still weighs on the cyclical outlook. The good news is that there have been offsetting positives, but if the income problem continues to deteriorate, eventually it’ll drag everything down with it.
It may end up as a false alarm if the labor market can extend its recent revival in minting jobs. The trend in initial jobless claims suggests that growth is still on our side. But let’s not soft-pedal the stakes. There’s a lot riding on this Friday’s scheduled update for February income and spending. On the income side in particular, encouraging numbers are desperately needed at this point. Based on the consensus forecast, however, modest growth is the best-case outlook at the moment. If so, that falls short of what’s needed to stabilize if not reverse the slowdown in the annual rate of growth in personal income. Here’s to hoping there’s a robust surprise coming our way!