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Chicago Fed Data Points to Slowing Economy

By Rom Badilla, CFA, Bondsquawk

The start of the week featured two major economic data releases. The first release revealed that the U.S. economy is showing signs of weakness while the second release as a separate report showed that manufacturing in the Texas region improved in September.

The Federal Reserve Bank of Chicago released their U.S. National Activity Index, which suggests that the economy is slowing down.  The reading for August came in at -0.87.  Furthermore, the prior month reading was revised from an initial reading of -0.13 to -0.12.  The Index is a gauge of economic activity and inflationary pressures which is drawn from 85 economic indicators that covers output, income, employment, consumption, housing starts, sales, and inventories.

As a result, the 3-month moving average fell deeper into negative territory. The negative August print pushed the 3-month moving average to -0.47 from -0.26 in July. According to the Chicago Fed, a less than -0.70 3-month moving average following a period of economic expansion suggests that there is an increasing likelihood that a recession has begun. Conversely, a greater than 0.70 average more than two years into an expansion equates to an increasing likelihood that a period of sustained accelerating inflation has begun.

In a separate report, the Dallas Federal Reserve released their regional manufacturing activity for September. The General Business Activity index improved from -0.9 in September from -1.6 in the prior month. The September improvement surpassed market expectations as the median of economists’ forecasts was calling for -2.7.

All of the components increased which translated into the better than expected number in the headline number. New Orders which is a gauge of future demand improved from 0.2 in August to 5.3 while Production jumped by 3.6 points to 10.0 in September. Capacity Utilization which represents the number of factories in use in relation to total capacity, jumped from 1.7 in the prior month to 9.3 in September.

The Dallas Fed conducts this monthly survey of manufacturers in Texas regarding their operations in the state. Participants from across the state represent a variety of industries. The threshold of the index and the sub-indices is zero with positive numbers indicating growth and negative numbers reflecting decline.

Overall, the Chicago Fed and Dallas Fed, coupled with last week’s Empire State and Philadelphia Fed surveys, suggest that the September ISM Manufacturing Index which is released in early October should remain soft and come in at or below 50, suggesting below trend growth for the U.S. economy. A print in the low 40’s suggests recession while a print in the high 50’s coincides with robust growth. Baring a major move in the national number, U.S. Treasury rates will remain in its current trading range for the time being.