Economy

Chicago Fed Shows Broader US Economy Not Worrying About Brexit

Jon C. Ogg

Published: July 21, 2016 10:45 am

Last Updated: January 13, 2020 5:28 am

Maybe the U.S. economy is truly thinking “So What About Brexit!” if the Federal Reserve Bank of Chicago is accurate. Its latest Chicago Fed National Activity Index (CFNAI), which is a national report rather than a regional one, rose into positive territory — up to +0.16 in June from −0.56 in May.

What investors and economists need to understand here is that this is a broad economic measurement tool. The CFNAI is a weighted average of 85 existing monthly indicators of national economic activity, and it is constructed to have an average value of zero and a standard deviation of one. A positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend.

June gains were led by improvements in production-related indicators. Still, three of the four categories increased from May. Two of the four categories made positive contributions to the index in June.

While investors and economists may cheer a positive reading overall, the three-month average still suggests that overall U.S. economic growth was slightly below the historical trend and that there is an expected subdued inflationary pressure over the coming year.

Thursday’s report showed that 40 of the 85 individual indicators made positive contributions to the CFNAI in June. That left 45 making negative contributions.

The 85 economic indicators that are included in the CFNAI are drawn from four broad categories of data: production and income; employment, unemployment, and hours; personal consumption and housing; and sales, orders, and inventories.

As a reminder, the expectations have become quite muted for Federal Reserve rate hikes to come on with much vigor. The Federal Reserve has reached full employment, but there are obvious signs that the jobs market needs to improve. What is still lacking is the Fed’s 2.0% to 2.5% inflation target. The CFNAI is suggesting that inflationary pressure just are not bubbling up.