June 26, 2017 Reading Time: 2 minutes

The Chicago Fed National Activity Index (CFNAI) registered a -0.26 reading in May, down from +0.57 in April. The index is a composite of 85 different economic data series divided up into four groups. It is designed so that a reading of zero indicates economic activity is growing at its long-term trend rate while readings above zero suggest above-trend growth and readings below zero suggest below trend growth.

The three-month moving average came in at +0.04 in May, down from +0.21 in April. Historically, periods of economic expansion have been associated with three-month moving averages above –0.70. Conversely, economic contractions have historically been associated with three-month moving averages below –0.70.

Among the four groups, production and income indicators, employment indicators, and personal consumption and housing indicators had negative results in May. Sales, orders and inventories indicators made a slight positive contribution for the month.

Despite the drop in May, the three-month average has been above zero for five of the past six months and has been above the -0.70 threshold associated with recession since September 2009. Those results suggest that the economy is growing close to its long-run trend rate and that the probability of recession remains low.

In addition to the Chicago Fed’s National Activity Index, the Census Bureau released data on orders for durable goods at the nations manufacturers for the month of May. New orders for durable goods fell 1.1 percent following a 0.9 percent drop in April and a 2.4 percent jump in March. Year-to-date, durable goods orders are up 2.5 percent compared to the same period a year ago. Aircraft orders, part of the transportation category, led the declines in May with defense aircraft orders falling 30.8 percent and nondefense aircraft orders dropping 11.7 percent. These declines were partially offset by a 1.2 percent gain in orders for motor vehicles and parts. Altogether, transportation equipment orders fell 3.4 percent for May.  When that segment is excluded from the total, durable goods orders rose 0.1 percent for May and show a 4.5 percent increase year-to-date versus a year ago.

Orders for nondefense capital goods excluding aircraft, a proxy for business investment, fell 0.2 percent in May following a 0.2 percent rise in April. Year-to-date, orders for nondefense capital goods excluding aircraft are up 2.3 percent versus a year ago.

Business investment has been broadly weak over the past few years though there have been some signs of improvement over the past six months or so. Strong cash flow, rising profits and healthy balance sheets combined with the potential for faster increases in labor costs may prompt business to accelerate investment to help boost productivity and restrain upward pressure on unit labor costs.

Robert Hughes

Bob Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.

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