President Moskow: You Funded It, Now Use It

By: Paul Kasriel | Wed, Feb 21, 2007
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The Federal Reserve Bank of Chicago economic research department calculates an index of economic activity known as the Chicago Fed National Activity Index (CFNAI). The CFNAI is a weighted average of 85 existing monthly indicators of economic activity drawn from five broad categories: 1) output and income 2) employment, unemployment and hours 3) personal consumption, housing starts and sales 4) manufacturing and trade sales and 5) inventories and orders. This index is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward trend growth rate over time, a positive index corresponds to growth above trend and a negative index corresponds to growth below trend. The preferred way to look at the CFNAI is on a 3-month moving average basis. The 3-month moving average of this index in January was minus 0.29, suggesting that the pace of economic activity was below trend. In fact, January marks the fifth consecutive month in which the 3-month moving average of the CFNAI has indicated below trend economic growth (see Chart 1). The CFNAI edged into negative territory in September 2005 because of the disruption of economic activity from Hurricane Katrina. The last time the CFNAI was consistently in negative territory was 2001 through 2003, when real GDP growth was, for the most part, below 3%.

Chart 1

How well does the CFNAI correlate with real GDP growth? Chart 2 suggests "pretty well." The correlation between the quarterly average CFNAI, advanced by one quarter, and the year-over-year percent change in real GDP is 0.81 out of a possible 1.00 - not bad for Fed work.

Chart 2

How well does the CFNAI predict the directional behavior of the federal funds rate? Not as well as it does real GDP growth, but still pretty well, all things considered. The correlation between the quarterly average CFNAI, advanced three quarters, and the year-over-year percentage point change in the federal funds rate is 0.68 (see Chart 3).

Chart 3

Although Chicago Fed President Moskow keeps threatening to vote to raise the federal funds rate, by the time he retires in August, his successor will be supporting cuts in the federal funds rate - cuts presaged by the index, CFNAI, whose derivation and calculation were funded by none other than Chicago Fed President Moskow. It is beyond me why ultimate taxpayer dollars are used by the Federal Reserve System to conduct economic research and that research is routinely ignored in policy making.



Paul Kasriel

Author: Paul Kasriel

Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

Paul Kasriel

Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.

Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.

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