What is going on in the economy?

An often overlooked index which can be a useful is the CFNAI or Chicago Fed National Activity Index.

According to the Chicago Fed:

The CFNAI is a weighted average of 85 existing monthly indicators of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend.

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.

The CFNAI corresponds to the index of economic activity developed by James Stock of Harvard University and Mark Watson of Princeton University in an article, "Forecasting Inflation," published in the Journal of Monetary Economics in 1999. The idea behind their approach is that there is some factor common to all of the various inflation indicators, and it is this common factor, or index, that is useful for predicting inflation. Research has found that the CFNAI provides a useful gauge on current and future economic activity and inflation in the United States.

The CFNAI index will provide a good general overview of what economic activity is like in the United States. The most recent rating released today shows that activity moved up slightly from -.68 to -.45. While all of the categories showed negative performance, there was a pick-up in activity. Growth is below trend which should be expected given the decline in housing but does not seem to be in bad shape. The index also does not indicate that there is a potential inflation problem. It is off of the highs seen in 2006. Looking at this index suggest that rates should be more range-bound except for reaction to news on the credit crunch issue.