Chicago Fed Index Well Into Recession Territory

The National Activity Index (CFNAI) from the Chicago Federal Reserve Bank for November continued on a downtrend and remained in recession territory. The latest reading of -2.47 followed a short-lived October bounce back from two hurricanes. Since 1970 there has been a 75% correlation between the level of the index and the q/q change in real GDP.

The three-month moving average of the index of -2.49 was at its lowest level since January of 1982.

An index level at or below -0.70 typically has indicated negative U.S. economic growth. A zero value of the CFNAI indicates that the economy is expanding at its historical trend rate of growth of roughly 3%.

The complete CFNAI report is available here and the historical data are available in Haver's SURVEYS database.

Each category of the index including employment, production, income, consumption & housing made a negative contribution to the November index.

The CFNAI is a weighted average of 85 indicators of economic activity. The indicators reflect activity in the following categories: production & income, the labor market, personal consumption & housing, manufacturing & trade sales, and inventories & orders.

In a separate survey, the Chicago Fed indicated that its Midwest manufacturing index fell during October to its lowest level since 1997. The auto sector continued to lead the weakness but the steel and machinery components also were weak.

Japan announced today a 233 billion yen deficit in its foreign trade for the month of November. Monthly deficits in foreign trade are rare in Japan and this was the third deficit in the last four months. On a three month moving average of the seasonally unadjusted data, the results of the last few months are even more dramatic as can be seen in the first chart. These deficits of recent months are the first to have occurred since the late seventies and early eighties.

Exports were 27% below November 2008 due in part to the slowing of world demand and also to the rise in the yen. The rise in the yen over the past few months is compared with the performance of the dollar, the euro and the U.K. pound in the second chart. Between August 7 and December 19 (The recent low for the yen and the most recent), the broad trade weighted yen appreciated 32%, while the euro was virtually unchanged, the dollar was up 10% and the pound was down 18%. While a higher yen might ordinarily lead to higher imports, the current low level of the propensity to consume in Japan has actually resulted in a decline of 14% in imports from a year ago.

A rapid deceleration…The sharp drop in the growth rate for orders in the current quarter is telling of the rapidity with which this slowdown has struck Europe. Orders in the fourth quarter are falling at annual rates of 50% in Germany, 57% in France, 37% in Italy and nearly 70% in the United Kingdom. This obvious bespeaks of a sharp slowing for growth in 2008-Q4.

Severe real sector hit… While the headlines have focused on the financial sector and banking problems and, although German consumer sentiment has been supported, the hit to EMU MFG has been severe. Both the EMU MFG and Services PMIs have taken sharp drops. These barometers precede the availability of authentic activity measures. The purchaser type surveys are merely ‘indicators’ While variables such as industrial output and retail sales are the actual results.

Orders are an actual forward-looking series… The orders series is also an actual result and not simply an ‘indicator’. Orders, while not actual activity are true figures corresponding to activity that been contracted ahead. The orders data are available for October but PMI data for December already are in hand –and they continue to be weak.

The recognition lag... It has taken some time but Germany seems to have come around to the idea of more stimulus. The drop in the HICP for the Zone (bringing the Yr/Yr headline pace to 2.1%) may also free up the ECB to become less tentative. Both orders and sales are all falling and orders are falling with uniform and shocking weakness across EMU. The dramatic policy moves and in the US have been rekindles euro FX strength. Is that a good sign or a signal how far behind Europe is in adopting needed stimulus? There should be no question about the severity of the weakness in Europe. It’s not just a banking problem.

Business climate fell to 73 from 79 to a low since January of 1990 and tied for a life of series low last reached in June 1993 in this 35 year series. The recent trend and likely trend responses are also at their lowest since 2000. Order and foreign orders are now at their lowest since 2000 but they are very weak, in the bottom 5% to 7% of their respective ranges.

With this survey in hand INSEE now looks for France to suffer a deeper recession than previously thought. Exports are diving and plummeting sales now restrain and depress the manufacturing sector. The euro zone's second-biggest economy would probably contract by 0.8 percent quarter-on-quarter in the final three months of 2008 after growing just 0.1 percent between July and September, INSEE said in a quarterly report. In Q1 2009 INSEE forecasts that the economy will shrink by 0.4 percent and by 0.1 percent in the following quarter. In its previous quarterly report, published in October, INSEE had predicted a 0.1 percent decline in gross domestic product (GDP) in the third and fourth quarters of 2008. Its view clearly has worsened. Slowing global demand will continue to harm French exports, limiting any advantage gained from recent softening in the euro, the statistics office said (of course since this time the euro has strengthened significantly making this point all the more forceful). INSEE said that companies' efforts to run down surplus stocks are a further restraining factor on manufacturing output, especially in the fourth quarter.