The Chicago Fed National Activity Index measures whether the economy is expanding on, above, or below its historical trend
The Chicago Fed National Activity Index (CFNAI) is a weighted average of 85 different economic indicators from four basic categories: production and income, employment-related indicators, personal consumption and housing, and sales, orders, and inventory data. A zero value for the index means the economy is growing at its historical trend, a positive number means it’s growing above trend, and a negative number means it’s growing below trend. The index itself can be volatile, as you can see from the following chart. Generally speaking, most economists focus on the three-month moving average, and when the average gets outside a range of -0.7 to +0.7, it usually signals turning points in the economy. Given that the index is basically an amalgamation of different economic indicators that have already been released, it isn’t really a market-moving index—but it is a good top-down view of how the economy is generally performing.
(Read more: Mortgage rates fall slightly)
The CFNAI index showed economic activity improved slightly in June
After hitting +0.6 in February, the index bounced back into negative territory for the last four months. The three-month moving average was -0.26, meaning the economy is growing slightly below trend. A reading of -0.7 usually indicates that a recession has started. Employment-related indicators were positive, at +0.06, as was production, at +0.04. Consumption and housing declined to -0.19. Overall, the index shows an economy growing slightly below trend, but still improving.
(Read more: What exactly is quantitative easing? Part 3)
Implications for homebuilders
Overall, the report shows the economy is still expanding moderately, more or less in line with its historical trend. For the real estate sector, consumption and housing remained steady, although still below historical trends. While the housing sector has improved markedly from a year ago, the rise comes from a very low base and is still below what we would consider “normalcy.”
Overall increases in business activity and consumption are starting to drive more business for homebuilders, like Lennar (LEN), KB Home (KBH), Toll Brothers (TOL), Standard Pacific (SPF), and NVR Corp (NVR). Housing starts have been so low for so long that there’s some real pent-up demand that will unleash as the economy improves. We’re still early in the earnings season, and KBH, LEN, and NVR all reported good earnings—although NVR was weaker than the others due to its primarily East-Coast focus.
(Read more: Mortgage Rates Keep Increasing)
More From Market Realist
- Is Student Loan debt crushing the first time homebuyer?
- Mortgage rates jump over 4%
- Real Estate Price Appreciation widely dispersed by location
- Budget, Tax & Economy