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Chicago Fed: Slower Economic Activity In October

 November 26, 2012 01:13 PM


The economy's momentum weakened last month, according to today's update of the Chicago Fed National Activity Index (CFNAI). The slowdown isn't surprising, given the monthly declines cited in several reports for October data—retail sales and industrial production, for instance. The question remains if Hurricane Sandy distorted the data? That's a possibility, although it's not clear how much we can blame on weather for last month's deceleration. Meantime, with the fiscal cliff approaching, today's CFNAI report will surely promote worries that the economy is headed for rough seas.

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Nonetheless, it's still premature to pull the plug on the outlook for growth. CFNAI's three-month average for October is -0.56, or slightly above the tipping point level of -0.70, below which is considered a signal of "an increasing likelihood
that a recession has begun," according to the Chicago Fed. That doesn't leave much room for comfort, but if we've learned anything in the last few years when it comes to business cycle analysis it's that early and impulsive cries that a new recession has started without sufficient data has a dismal track record.

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My own analysis supports the case for reserving judgment on what comes next. Last week's update of The Capital Spectator Economic Trend Index (CS-ETI) reminds that a broad review of economic numbers continues to suggest that recession risk is low. Since CS-ETI's update, we've learned that housing starts and new permits in October continue to look encouraging and so the incoming data isn't uniformly dark. Meantime, Friday's nowcast of GDP on these pages for the fourth quarter, although weaker than the reported 2.0% increase for Q3, is still comfortably in positive territory.

The point here isn't to white wash the signs of trouble on the macro landscape, but to remind that it's still too early to issue a high-confidence warning that the economy has taken a fatal and unavoidable turn for the worse. That may yet be the business cycle's fate, but jumping on that bandwagon of pessimism still requires quite a lot of speculation about what comes next and ignoring the genuinely positive signs in the economic data overall.

That includes assuming that the threat arising from the fiscal cliff will be allowed to roil the economy. The potential from self-inflicted wounds via the Beltway crowd can't be ignored, but there's still time to tame this beast.

Nonetheless, we're at a perilous stage once more for the business cycle. The good news: a surplus of clear signs that growth has taken a holiday remains elusive in terms of the broad trend. Yes, the defenses are weakening on some fronts and so it's critical to monitor the data closely, day by day. If we slip over the edge in convincing terms, you'll read about it here. Meantime, cautious optimism, although running lighter these days, is still recommended.
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