{"id":20894,"date":"2013-06-27T10:04:12","date_gmt":"2013-06-27T14:04:12","guid":{"rendered":"http:\/\/www.ino.com\/blog\/?p=20894"},"modified":"2013-06-27T10:04:12","modified_gmt":"2013-06-27T14:04:12","slug":"this-little-known-fed-index-may-be-signaling-recession","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2013\/06\/this-little-known-fed-index-may-be-signaling-recession\/","title":{"rendered":"This Little-Known Fed Index May Be Signaling Recession"},"content":{"rendered":"

By: David Sterman Street Authority<\/a><\/p>\n

Over the past year<\/span>, economists<\/span> have noticed an unusual pattern as they digested the series of monthly reports on housing, consumer confidence, purchasing managers, trade flows and other key economic inputs.<\/p>\n

These reports showed consistently mixed signals, though it was clear that the U.S. economy<\/span> was faring OK. And that has led to hopes of more consistently positive reports in the second half of 2013 and into 2014. By next year, many economists have come to expect a firmer backdrop, with GDP<\/span> perhaps growing in the 2.5% to 3% range.<\/p>\n

Yet it may be time to start questioning that brightening outlook. Perhaps the greatest measure of economic activity -- one ignored by most investors, unfortunately -- is flashing yellow and may soon be flashing red<\/span>.\u00a0<\/p>\n

85 Inputs
\n<\/strong>While many economic surveys aim to capture a slice of the U.S. economy, the Chicago Fed's National Activity Index<\/span> (CFNAI) looks at 85 different economic inputs focused on production, income<\/span>, employment, personal consumption and housing. A quick snapshot<\/a> of the most recent reading actually shows a slight improvement from the previous month.<\/p>\n

Yet economists at the Chicago Fed emphasize the importance of looking at longer-term trends rather than monthly snapshots. That's why they suggest that the three-month moving average<\/span> of these reports is where you should focus -- and by that score, the CFNAI is in trouble.<\/p>\n

CFNAI 3-Month Moving Average<\/strong>
\n\"\"<\/strong><\/p>\n


\nSource: Federal Reserve Bank<\/span> of Chicago<\/em><\/p>\n

Though the CFNAI began the year in positive territory, it has recently slipped below negative 0.40. Note<\/span> that the Chicago Fed believes that a reading of negative 0.70 signals entry into a recession<\/span>, and we still have a ways to go before that happens.<\/p>\n

In addition, the current slide could prove short-lived. After all, this index slid to negative 0.49 in October 2012 and then rebounded. Back then, the economy was looking tenuous as businesses and consumers were frozen by fears of a possible government shutdown (which never came to pass).<\/p>\n

This time around, gauges of consumer activity appear to be holding their own, but several business gauges -- such as the purchasing managers' index, sales<\/span> trends and inventory<\/span> changes highlight a slowly weakening business sector.<\/p>\n

The question is whether the ongoing challenges in Europe, the incipient slump in China, Brazil and elsewhere, and the impact of our own sequester will<\/span> lead to further weakness in the business sector. This is an issue<\/span> that you should be closely monitoring if you remain fully invested in the stock<\/span> market<\/span>, especially if you're holding economically sensitive stocks<\/span>.<\/p>\n

Later this week, a number of Federal Reserve members will be weighing in on the economy, including:<\/p>\n