Chicago Fed Index Suggests Continued Below Trend US Growth in Q2

By: Paul_L_Kasriel

The Chicago Fed publishes a national economic activity index each month that only the Chicago Fed's economic research department and I pay attention to. This index is not a leading one, but is a coincident one.

The Chicago Fed National Activity Index (CFNAI) is a weighted average of 85 existing monthly indicators of economic activity drawn from five broad categories: 1) output and income 2) employment, unemployment and hours 3) personal consumption, housing starts and sales 4) manufacturing and trade sales and 5) inventories and orders.

This index is constructed to have an average value of zero and a standard deviation of one. Because economic activity tends toward trend growth rate over time, a positive index corresponds to growth above trend and a negative index corresponds to growth below trend. The 3-month moving average of the CFNAI in May was minus 0.20 - the ninth consecutive month in which it has been in negative territory.

The CFNAI is suggesting that second-quarter real GDP growth will come in below-trend, which would mark the fifth consecutive quarter to do so.

What is the trend of GDP growth? In the past 40 years, real GDP has grown at a compound annual rate of growth of 3.05%. So, the recent behavior of the CFNAI is pointing to sub-3% real GDP growth in Q2, which, if it were to occur, would be below what most forecasters (but not us) are currently expecting. The chart below contains the behavior of the CFNAI and quarter-to-quarter annualized real GDP growth, with the 3.05% trend rate of real GDP growth shown as the blue horizontal line.

By Paul L. Kasriel
The Northern Trust Company
Economic Research Department - Daily Global Commentary

Copyright © 2007 Paul Kasriel
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

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