Chicago Fed National Activity Index Suggests Growth Picked Up in February

It reported that its National Activity Index (CFNAI) improved to 0.16 last month from -0.33 in January, revised from -0.25. February's was the first positive reading in three months. The three-month moving average of the index eased m/m to -0.21, but still was improved from the low of -0.52 last 00April. During the last 20 years, there has been a 70% correlation between the index and the q/q change in real GDP.

The rise in the February index reflected a sharp rise in the Production & Income component to 0.11 from -0.34 in January. It was the first positive figure in three months. The Employment, Unemployment & Hours series edged higher to 0.05 from 0.01, the best reading since September 2019. Working the other way, the Personal Consumption & Housing gauge slipped to 0.02 from 0.03, which was the highest level in 12 months. The Sales, Orders and Inventories measure eased to -0.03 from -0.02.

The diffusion index of the CFNAI, which measures the breadth of component change, fell to -0.20.   

The CFNAI is a weighted average of 85 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.

These figures are available in Haver's SURVEYS database.

The National Association for Business Economics expectations of 1.8% growth in real GDP during 2020 and 2.3% in 2019 were unchanged from the forecast published early in October. These growth rates are below the 2.9% gain in 2018. Quarterly growth is expected to average 1.9% next year, revised from 1.8%. It follows a quarterly average gain of 2.1% in 2019 and 2.5% in 2018, which was revised lower. Growth in personal consumption expenditures is forecast to ease to 2.4% in 2020 from an unchanged estimate of 2.6% this year. Business fixed investment growth is expected to moderate to 1.7%, revised from 2.1% in 2020, down from a lessened 2.3% during 2019. Expected growth of 1.4% in residential investment next year was revised slightly higher, after a lessened 1.7% decline estimated for 2019. Projected government spending growth was little changed at 1.8% in 2020 and 2.3% in 2019. Deterioration in real net exports is forecast to continue. Estimates of 2.2% import growth in 2020 and 1.4% export growth were slightly lower than expected earlier. The expected rate of inventory investment is still forecast to slow to the lowest speed since 2017.

Housing starts are expected to average 1.28 million units next year, revised from 1.26 million. That compares to a raised forecast of 1.26 million starts this year. Expected light vehicle sales are projected to ease to an unrevised 16.6 million units, down from the peak of 17.5 million in 2016. The average monthly gain in payroll employment is expected to slow to 134,000 next year, which was lessened slightly. It remains below the average 175,000 gain expected this year and lower than the high of 251,000 averaged in 2014. Expectations for the unemployment rate in 2020 were unchanged at 3.7%, leaving it at the lowest level since 1968.

Consumer price inflation is forecast to average a lessened 2.0% (Q4/Q4) in 2020. Price inflation next year, as measured by the PCE price index, should pick up to a lessened forecast of 1.9% from a reduced estimate of 1.5% this year. The chain PCE price index excluding food & energy should rise to an unchanged projection of 2.0% growth next year (Q4/Q4) from 1.8% in 2019. It would be the quickest growth since 2007, up from the 2010 low of 0.9%. The cost of crude oil is expected to average $57 per barrel at the end of next year, revised from $56 and higher than the low of $37 per barrel at the end of 2015.

The forecasted 2.10% interest rate on a ten-year Treasury note at the end of next year was raised slightly from 2.05%. The expected 1.80% rate at the end of this year also was raised a bit. The Federal funds rate of 1.60% projected at the end of next year was unchanged. After-tax corporate profits should rise 2.6% next year. That was little changed from the previous forecast and would be below 4.2% growth in 2017. The expected Federal government budget deficit of $1.075 trillion next year was increased and compares to a raised estimate of $984 billion in FY'19.

The figures from the latest NABE report can be found in Haver's SURVEYS database.