The Federal Reserve finally has decided to raise interest rates, for the first time in close to a decade. The move was supposed to signal confidence in a return to normalcy in the economy. Unfortunately, this rate hike came late and also came at a time that overall economic activity is slowing. Some economic reports are signaling lower growth, and some are even starting to feel nearly recessionary.

The Chicago Federal Reserve has released the Chicago Fed National Activity Index (CFNAI) with a reading of −0.30 for November. This number is negative, implying slight contraction, and is worse than the −0.17 reading from October.

What economists and investors will pay attention to here is that the drop was led by declines in production-related indicators. Two of the four broad categories of indicators that make up the index decreased from October. Also, three of the four categories made negative contributions to the index in November.

The index’s three-month moving average fell to –0.20 in November from –0.18 in October, suggesting that growth in national economic activity was somewhat below its historical trend. The economic growth reflected in the three-month average suggests subdued inflationary pressure from economic activity over the coming year.

The CFNAI Diffusion Index managed to improve slightly but still remaining in negative territory, to –0.20 in November from –0.25 in October.

Some 37 of the 85 individual indicators made positive contributions to the CFNAI in November. Where the problem arises is that 48 of the individual indicators made negative contributions.

Some investors and economists may care about the market internals here sequentially. It turns out that 39 indicators improved from October to November, while 44 indicators deteriorated and two were unchanged, but of those indicators that improved, 16 made negative contributions.

The CFNAI is a weighted average of 85 indicators of national economic activity drawn from four broad categories of data. The four sectors are as follows: 1) production and income; 2) employment, unemployment and hours; 3) personal consumption and housing; and 4) sales, orders and inventories. A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth, while negative values indicate below-average growth and positive values indicate above-average growth.

Additional data were as follows:

• The contribution from production-related indicators to the CFNAI fell to –0.27 in November from –0.11 in October.
• Industrial production declined by 0.6 percent in November after falling by 0.4 percent in October.
• Manufacturing production was unchanged in November, following a gain of 0.3 percent in the previous month.
• Employment-related indicators contributed +0.05 to the CFNAI in November, down slightly from +0.08 in October.
• Nonfarm payrolls rose by 211,000 in November after rising by 298,000 in October, while the unemployment rate was unchanged at 5.0 percent in November.
• The contribution of the personal consumption and housing category to the CFNAI rose slightly to –0.06 in November from –0.11 in October.
• Housing starts increased to 1,173,000 annualized units in November from 1,062,000 in October. In addition, housing permits moved up to 1,289,000 annualized units in November from 1,161,000 in the previous month. The sales, orders, and inventories category made a contribution of –0.02 to the CFNAI in November, up slightly from –0.03 in October.

Other key issues were mentioned as follows:

• The CFNAI was constructed using data available as of December 17, 2015. At that time, November data for 51 of the 85 indicators had been published.
• The October monthly index value was revised to –0.17 from an initial estimate of –0.04, and the September monthly index value was revised to –0.13 from last month’s estimate of –0.29. Revisions to the monthly index value can be attributed to two main factors: revisions in previously published data and differences between the estimates of previously unavailable data and subsequently published data.
• The revision to the October monthly index value was due primarily to the former, while the revision to the September monthly index value was due primarily to the latter.

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