The European debt crisis continues to make headline news with Spanish and Italian government bond yields marking new post summit highs. These events have intensified the downside risks of economic growth in the United States in the quarters ahead. Buried in the sea of glum economic headlines, the Chicago Fed National Activity Index (CFNAI) increased to -0.15 in June from -0.48 in May. This index has a reputation of identifying turning points of economic activity in the United States.

The 3-month moving average of the CFNAI is a better gauge than the monthly measure. The latest 3-month moving average is -0.2 vs. -0.38 in May. According to the Chicago Fed, readings of the 3-month moving average below -0.7 imply an increasing likelihood that a recession has commenced. By implication, the 3-month moving average of the June CFNAI is a bit of encouraging news because the index is not pointing to worsening economic conditions.

Chart 1 presents the entire history of the index, while Chart 2 focuses on the recent years. The turnaround of the CFNAI in June could be a precursor of improving economic conditions. In June, the production, housing, and consumer related indicators of the overall index rose while that of employment-related indicators were neutral.

Asha Bangalore — Senior Vice President and Economist

http://www.northerntrust.com

Asha Bangalore is Vice President and Economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was Consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

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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