CFNAI: Q1 Weakness Not Just A “Weather Report”

There has been much “hope” by mainstream economists that the slowdown in economic growth in the first quarter of this year was simply due to the blast of inclement weather that shuttered production in much of the North East. While the “weather story” most certainly had a negative impact on economic growth in the short term, there is not much evidence that an economic revival is in the offing.

I have written several times in the past about the most overlooked economic indicator – the Chicago Fed National Activity Index (CFNAI). This index is a broad composite of 85 subcomponents that provide a broad overview of activity in the domestic economy from consumption to production. The most recent release of the CFNAI for March showed a rather steep decline in national activity to .20 from .53 in Februrary. That decline was driven by a steep fall in Sales, Orders and Inventories from .08 in Februrary to a negative .02, and a decline in Production and Incomes from .54 to .21 in March. The drop in these two specific indices does not bode well for continued increases in areas such as employment, hours and personal consumption which are primarily lagging indicators relative to actual activity. 

The “hope” of economic revival is not new. It has been the repeated mantra by mainstream economists and the Federal Reserve since the end of the financial crisis. However, as shown in the chart below, each economic bounce due to an inventory restocking cycle has been short lived with economic growth languishing at sub-par rates.

As I said above, the cold winter blasts of snow and ice that shuttered in much of the North East during the beginning of 2014 certainly had a short-term negative impact on economic growth. Therefore, it is not surprising that we have seen an uptick in activity in recent economic reports as companies once again restock inventories and some “pent up” demand flows through the economy. However, like we have seen repeatedly before, that surge in activity is likely not sustainable as the underpinnings of economic stability remain vacant.