Monday, December 1, 2008

Economic index confirms that this recession is going to hurt

This week's economic statistics headline conditions in manufacturing, construction and labor. The reports help to clarify the overall economic health of the U.S. (GDP) in the fourth quarter of 2008, which is expected to contract 4% at an annualized rate. If analyzing a plethora of economic reports is not how you want to spend your spare time, the Chicago Fed National Activity index aggregates the statistics for you; it confirms that the U.S. is already in the worst recession since the 1980's.

If you are not a professional forecaster, then you may want to follow the Chicago Fed National Activity index (CFNAI). The index is constructed using 85 economic indicators in the following broad categories: (1) output and income, (2) employment, (3) consumption and housing, (4) manufacturing and trade and (5) inventories and orders.

The index tends to revert to the value zero, but values below -0.7 indicates that the economy has moved into a recession and above 0.2 indicates that the economy has emerged from the recession. The October value was -2.09.

The chart illustrates the monthly CNAI and its 3-month moving average spanning Jan. 1970 to Oct. 2008. The 3-month average index indicates that the economy is in a recession with an October reading of -2.09. Furthermore, the CNAI 3-month average fell below -0.7 in December 2007, suggesting that the recession started at the end of 2007.

The October 3-month average CNAI value is below the trough values for the last two recessions, -1.3 and -1.9, respectively. Accordingly, the 2008-2009 recession is shaping up to be the worst recession since the 1980’s.

The chart above illustrates economic growth across the last seven recessions. This week's economic reports – especially the employment situation which is expected to report a surge in the unemployment rate to 6.8% - are likely to confirm that the U.S. economy is sick and not getting better.

Our only hope is that policy makers get their acts together; the Fed is still too focused on the financial crisis, and Congress is dragging its feet on a stimulus package. Tim Duy (via Mark Thoma) calls it best on the Fed:

“The flow of data will put pressure on the Federal Reserve to ease further, although the exact nature of easing remains in doubt. While a policy target remains for the fed funds rate, endless debates over to what extent the Fed can lower rates below 1% represents nothing more than lost productivity. The Fed’s attention is elsewhere, focused on replacing dormant sections of financial markets, such as last week’s move to Federal Reserve to support mortgage and consumer lending markets via $800 billion of new initiatives...

… In short, incoming data will confirm that the US economy is locked in the throes of recession, placing pressure on the Fed to ease further. But as they are near or at the limits of traditional monetary policy, Bernanke & Co. will have to choose between defining explicit targets for quantitative easing, or leaving market participants guessing about the nature of the next lending facility. Policymakers are likely to opt for the former; ideas are floated by Federal Reserve Chairman Ben Bernanke
here. We are left waiting for the details.”

Rebecca Wilder


  1. The problem seems to be that Bernanke has ideas, puts some into action and then changes the action afterwards. He never sticks to any one course so how in the world is one to gain confidence from the Fed actions? Can't image what it is like to be a CEO or CFO of any company - there is nothing on which to rely.

  2. From RW's link for the 'projected 4% contraction this Q':
    [Without further action on monetary and fiscal policy, the economy faces “a lot of downward momentum right now” with an annualized 4% decline in economic output in the fourth quarter and 2% in the first quarter before struggling back to growth. Meyer, vice chairman of forecasting firm Macroeconomic Advisers, said the unemployment rate would peak at 8% to 8.5% by the end of next year.]

    Something remains amiss in recent projections, and I believe I've questioned this stat prior on this blog: For the degree of Contraction, that unemployment figure (and the US methodology for deriving that figure has always been questionable)(it is quite different from the OECD method, albeit many nations have variations) seems surprisingly low.

    It does put further question to Obama's claim of 'creating 2.5M jobs', even though that quote has been mischaracterized. It would be difficult to add more jobs to a figure as good as that when/if the US economy contracts 4%.

    I'm left to ponder some of Meyer's projections....


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