Yesterdays news that the Chicago Fed National Activity Index (CFNAI) increased last month provides another data point to consider in the debate about recession risk. Looking backward doesnt necessarily tell us whats coming, but its clear that Decembers economic momentum strengthened. January and beyond, of course, are still open to interpretation.
Led by improvements in production- and employment-related indicators, the Chicago Fed National Activity Index increased to +0.17 in December from 0.46 in November, according to an accompanying statement. The indexs three-month moving average, CFNAI-MA3, increased from 0.19 in November to 0.08 in Decemberits highest value since March 2011.
CFNAI is a weighted average of 85 indicators of US economic activity. The Chicago Fed recommends reading its 3-month moving average (CFNAI-MA3) as follows: a value below -0.70 after a period of economic expansion indicates an increasing likelihood that a recession has begun. By that standard, the December CFNAI-MA3 reading of -0.08 suggests that another downturn was nowhere in sight last month.
Thats no assurance that the coming months wont deteriorate. There are, as if we needed reminding, plenty of risk scenarios out there that might derail the still-fragile recovery. As I keep mentioning, the weak personal income and spending numbers are high on my list of potential trouble spots. Perhaps well learn if this worry is relevant or not when the January update arrives next Friday (Feb. 3).
Theres also Europe to consider and the potential for economic blowback as the Continent struggles to keep its own recession risk at bay. The UK, meantime, has its own problems as it moves closer to a second recession as economy shrinks 0.2%.
Lets not forget that the festering troubles with Iran may wreak havoc on the global economy. With the European Union set to impose economic sanctions on Iran for its nuclear program, the Iranian parliament is threatening to halt oil exports to Europe. Theres no sign of panic in oil trading, at least not yet. But if this crisis rolls on, the possibility for substantially higher energy prices cant be ruled out.
Perhaps the economic outlook isnt as rosy as it appears by looking solely at the data in the rear view mirror. It wouldnt be the first time that focusing on recent history blinds us to whats coming. The problem, of course, is that modeling the future is challenging, to say the least.
If the US does slip into a new recession sometime in the near term because of an exogenous shock from Europe, Iran, or some unknown unknown, does that count as a win for the recession forecasters? We all know that theres always another recession lurking in the future. The timing and specific catalyst are usually the great mysteries. As such, should there be a time limit on recession forecasts?