Back From the Abyss

By Michael Knox

Some highly intelligent people are of the view that the US recession ended in July. Judging by what the Chicago Fed National Activity Index tells us, they are wrong. Some other highly intelligent people suggest that the US recovery will be “U” shaped or “W” shaped. The Chicago Fed National Activity Index also suggests that they are wrong.

The Chicago Fed National Activity Index for July was released on 24 August. The three month moving average, CFNAI-MA3, was -1.69 in July. This means that activity was still 1.69 standard errors below long term trend. This is better than the -2.18 in June. However, the US economy still remained in recession in July.

Figure 1: CFNAI, Three Month Moving Average – 24 August 2009

The shape of the recovery being traced out by the Chicago Fed National Activity Index canbe seen in Figure 1.

The bounce so far is decidedly “V” shaped. There is no “U” or “W” in sight. The Chicago Fed National Activity

Index is a weighted average of 85 indicators of US economic activity. The indicators are drawn from 4 broad categories of data: Production & Income; Employment, Unemployment and Hours; Personal Consumption & Housing; Sales, Orders and Inventories. A zero value for the Index indicates that the US economy is
expanding at its historical trend rate of growth: negative values indicate below average growth; positive values indicate above average growth.

The improvement in the Index in July was firstly due to the production and income category.

Manufacturing production rose by 1% in July, the best monthly increase since December 2006. Manufacturing capacity utilisation also increased to 65.4 in July from 64.7 in June.

Employment related indicators were also better. Total non-farm payroll employment fell by 247,000 in July. This was much better than the fall of 443,000 in June. Average weekly initial unemployment claims in July also fell by 59,600 compared to June.

Of the 85 individual indicators, 61 improved from June to July while 23 got worse. Still, the US economy is not out of recession. Of the 61 indicators that improved, 31 still made negative contributions.

The US recession is not over. Still, the economy is improving. The reading of the CFNAIMA3 in July of -1.69 is way better than the low for this cycle of -3.63 in January. A reading of 1.69 is similar to the level in April 1982 in the recovery from the recession of that time. The US economy is still moving at 1.69 standard errors below long term trend. The economy isstill in a recession, but we are back from the abyss.


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