Data And Surveys Continue To Part Company

Last Friday, I discussed the growing gap between economic reports particularly when they measure the same basic areas of the overall economy. For example, how can the Markit Manufacturing PMI Index be negative for three months while the ISM PMI has surged higher during the same period. Both cannot be right.

Well, the same thing happened yesterday with the release of the Chicago Fed National Activity Index (CFNAI) which is arguably one of the most important economic indicatorsavailable. While the recent release of the Philidelphia Fed manufacturing survey surged to its highest level in years, the CFNAI fell to .14 from .29 last month.

(Note: The Chicago Fed National Activity Index (CFNAI) is a monthly index comprised of 85 subcomponents that provide a broad measure of economic activity nationwide.)

More importantly, while the Federal Reserve and ISM surveys have been showing strong increases in recent months; the production, income and consumption and housing components of the CFNAI have declined.  The chart below shows the CFNAI index broken down into the 3-month average of supply (production, income, employment) and demand (consumption, housing, sales).

There are TWO very important things to take away from the chart above. First, supply and demand have had an extremely tight correlation prior to the financial crisis. However, since the last recession demand has underperformed supply to a significant extent which confirms the weak economic underpinnings for the majority of the country. 

Secondly, while government related survey’s are showing a vast improvement in economic activity, there has been little marginal improvement in the CFNAI. In fact, as shown in the chart below, the 3-month average has turned significantly lower in the second and third quarters of this year which suggests that real economic activity is slowing.

With the economic recovery now more than six years into recovery it has become a“footrace” to the finish line. With asset prices at elevated levels in anticipation of an economic revival, the failure of such a resurgence could lead to a significant disappointment for investors. With extremely cold weather threatening a large chunk of the population, there are risks to both corporate earnings expectations as well as to economic growth.