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Chicago Fed National Activity Index falls again in April

CFNAIEnlarge GraphThe Chicago Fed National Activity Index measures whether the economy is expanding on, above, or below its historical trend

The Chicago Fed National Activity Index (CFNAI) is a weighted average of 85 different economic indicators from 4 basic categories: production and income, employment-related indicators, personal consumption and housing, and sales/orders/ inventory data. A zero value for the index means the economy is growing at its historical trend, a positive number means it is growing above trend, and a negative number means it is growing below trend. The index itself can be volatile, as evidenced by the chart above. Generally speaking, most economists focus on the 3-month moving average, and when it gets outside of a range of -.7 to +.7 it usually signals turning points in the economy. Given that the index is basically an amalgamation of different economic indicators that have already been released, it isn’t really a market-moving index; however, it is a good top-down view of how the economy is generally performing.

The CFNAI declines back into negative territory in March

After hitting +.7 in February, the index bounced back into negative territory with a reading of -.23 in March and a further negative reading of -.52 in April. The three month moving average was virtually zero, meaning the economy is more or less growing exactly on trend. Employment-related indicators were neutral, while production, consumption and sales data were negative. Production was strongly negative at -.34, while consumption and sales were mildly negative. The February index was revised upward to +.70 from its initial estimate of +.44.  The index generally indicates an economy growing at trend, with little to no inflationary pressure.

Implications for home builders

Overall, the report shows the economy is still expanding moderately, more or less in line with its historical trend. For the real estate sector, consumption and housing remained steady, although still below historical trends. While the housing sector has improved markedly from a year ago, it is from a very low base and still below what we would consider “normalcy.”

Overall increases in business activity and consumption is starting to drive more business for home builders, like Lennar (LEN), KB Homes (KBH), Toll Brothers (TOL), and NVR. Housing starts have been so low for so long that there is some real pent-up demand that will be unleashed as the economy improves. The shortage of skilled workers could negatively affect margins as business expands. NVR reported earnings this morning, disappointed with lower than expected numbers on the top and bottom line. Cost pressures and lack of available land inventory have been mentioned as issues by a couple homebuilders, but so far margins are still high and have been increasing. First quarter earnings from the homebuilders were generally robust, and their sales channel is deep. A lack of existing homes for sale is also a tailwind for the builders.