– March 26, 2018

The Chicago Fed’s National Activity Index suggests economic growth jumped in February, with the index coming in at 0.88, up from 0.02 in January. The index is a composite of 85 economic data series. It is constructed so zero represents trend growth in the economy, with readings above zero suggesting above-trend growth and readings below zero indicating below-trend growth.

The index posted its second-highest reading over the past 11 years, only behind a 0.90 result in October 2017. The six-month average, which helps reduce month-to-month volatility in the index, came in at 0.435, the highest since March 2006 (see chart).

The six-month average index remains well above zero, suggesting economic growth remains above its long-term trend. The six-month moving average has been moving higher since mid-2016 and is broadly consistent with the AIER Leading Indicators Index, which hit a low of 38 in March and April of 2016 and has posted very strong readings of 92 in three of the past four months. The performance is also broadly consistent with the stronger performance of real gross domestic product growth over the past few quarters. However, compared to prior expansions, the six-month average for the Fed’s index remains well below prior expansion peaks. During the 1991–2001 expansion, the index peaked at 0.763 in August 1994. Furthermore, in early expansions during the 1960s, ’70s and ’80s, the six-month average often went above 1.

The overall index comprises four component indexes: production and income; employment, unemployment, and hours; personal consumption and housing; and sales, orders, and inventories. For February, three of the four component groups posted positive contributions: Production and income made a 0.50 contribution compared to a −0.15 contribution in January. Employment-related indicators added 0.31 for the month after a 0.24 contribution in January while the sales, orders, and inventories segment added 0.09 in February, up from 0.03 in January. Personal consumption and housing made a −0.02 contribution versus −0.10 in January.

The performance of the Fed’s index over the past several months reflects the fact that the labor market remains robust, incomes are rising, and confidence is relatively high, and suggests the outlook remains upbeat, with the likelihood of recession over the next several months quite low. The favorable outlook, however, does not reduce the need to remain vigilant for signs of unsustainable growth, particularly in money and debt, and to avoid assumptions about future economic conditions that are overly optimistic and might result in underestimating risks.

Robert 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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