CFNAI: Will a production uptick shore up employment in March?

What is Chicago Fed National Activity Index (or CFNAI)?

The Chicago Fed’s National Activity Index (or CFNAI) for March will be released on Monday, April 21, 2014. It’s a national monthly index which estimates overall economic activity and related inflation. Since economic activity tends toward long-term average growth rate over time, a positive index reading implies the economy is growing above the historical trend rate of growth, while a negative index reading corresponds to below-average rate of growth. A reading of zero indicates the economy is growing at a historical growth trend rate.

CFNAI: Will a production uptick shore up employment in March?

The CFNAI is a weighted average of 85 existing monthly indicators of national economic activity. The 85 economic indicators that are included in the CFNAI are drawn from four broad categories of data: production and income; employment, unemployment, and hours; personal consumption and housing; and sales, orders, and inventories. Each of these data series measures some aspect of overall macroeconomic activity. The derived index provides a single summary measure of a factor common to these national economic data.

Highlights of February’s release

  • February’s CFNAI clocked in at 0.14, which was higher than January’s reading of -0.45. Three out of the four categories of indicators making up the CFNAI increased, with 51 indicators improving from January to February (out of which 15 made negative contributions), while 33 indicators deteriorated and one remained unchanged.
  • Manufacturing indicators and sales, orders, and inventories showed improvement, with production-related indicators contributing –0.26 to the CFNAI in February, increased from -0.38 in January. Output also increased by 0.8% in February after contracting 0.9% in January, with manufacturing capacity utilization increasing slightly to 76.4% in February compared to 75.9% in January.
  • Employment indicators and housing indicators were slightly disappointing. Although non-farm payrolls increased by 175,000 in February from 129,000 in January, the unemployment rate also increased to 6.7% from 6.6% the previous month due to an increase in the participation rate. Contribution from consumption and housing indicators to the CFNAI showed a marginal increase to -0.16 in February from –0.18 in January.

What investors can expect in the March release

  • Manufacturing and sales should show continued strength due to manufacturers benefiting from order backlogs and a spring thaw which has been late in coming this year.
  • Employment indicators should show slight improvement as additions to non-farm payrolls in March, at 199,000, have increased over February, although the unemployment rate remains put at 6.7%.
  • Consumption and housing indicators will remain weak in March due to:
  1. Higher food prices impacting discretionary spending,
  2. Higher home prices and low inventories, and
  3. Shift of Easter from March last year to April this year impacting retail sales.

In the next two sections we will look at manufacturing activity indices issued by Federal Reserve Banks of Richmond and Kansas City, which will also release this week. These are regional and cover activity in their respective districts. We will also look at the impact of these releases on companies in the S&P 500 Index (IVV) like Union Pacific Corporation (UNP) and FedEx (FDX). Both Union Pacific (UNP) and FedEx (FDX) are part of the iShares Transportation Average ETF (IYT), which tracks the Dow Jones Transportation Average Index. We will also consider the impact of the manufacturing indices on fixed income ETFs like iShares Floating Rate Bond (FLOT).