Warnings of a New Recession?

This month's CFNAI-MA3 is more evidence for the widely held notion that the economy slowed down during the first quarter and might not be speeding up now.

The Chicago Fed’s National Activity Index (CFNAI) is a broad-focused metric, gauging U.S. economy activity as a weighted average of no fewer than 85 different indicators in four basic classes. The four are production and income; employment, unemployment and hours; personal consumption and housing; and sales, orders and inventories. As the economists put it, CFNAI is a Goldilocks index, in which zero is exactly the place to be—not too “cold” (less than the historic growth trend) or too “hot” (more than the historic growth trend). The monthly CFNAI tends to be volatile, and fairly noisy, since a lot of the 85 indicators are volatile, so a more useful variant of the index is the CFNAI-MA3, or the three-month moving average for the index. It doesn’t jump around so much.

This month’s CFNAI-MA3, which was released on Monday, is more evidence for the widely held notion that the economy slowed down during the first quarter and might not be speeding up now. Not a major slump, but a slowdown that may or may not point to longer and deeper problems with the rate of growth (up to and including a new recession). In March, the three-month average came in at -0.27, compared with -0.12 in February. A distinct drop, but according to the Chicago Fed, not an indication of a recession. When the CFNAI-MA3 value moves below -0.70 following a period of economic expansion, then watch out for a recession (if it’s above +0.70, that supposedly a harbinger of inflation, but that hasn’t been an issue lately).

Or is the CFNAI-MA3 underestimating the chances of a recession coming? The Chicago Fed isn’t the only game in town when it comes to trying to describe the direction of the economy. The Economic Cycle Research Institute’s (ECRI) U.S. Coincident Index (USCI) of economic activity has also been dropping so far this year, with the latest report last week putting the USCI down 0.8—a fairly sizable drop. The ECRI is the organization that takes it upon itself to call a recession for the U.S. economy, and for better or worse, a lot of economists go along with that call, though the calls tend to be somewhat after the fact. So far the ECRI isn’t calling the current conditions a recession, but after all it wasn’t until after the Panic of 2008 that the ECRI determined, using its proprietary indexes, which the Great Recession actually got under way in December 2007 (the panic made it much worse, but it was already under way).

Other important numbers are coming up soon that will offer more clues about whether another recession, even a mild one, is ahead: for example, the first estimate of GDP growth in the first quarter, and the April jobs numbers at the end of this month. The most immediate concern for real estate interests isn’t the prospect of a recession—that might count as a mid-range or even long-range concern—but what the new data will do to the Fed’s decision-making when it comes to interest rates. If things get even a little more recession-like, it’s unlikely that the cost of money will go up anytime soon.