The Chicago Federal Reserve Bank said that the U.S. economy weakened significantly in October. The National Activity Index (NAI) declined from zero in September to -0.56 in October. The three-month moving average, which has now been negative for eight consecutive months, fell from -0.56 to -0.36.
Negative values suggest that the U.S. economy is growing below its historical average, and when the 3-month moving average falls below -0.70, the risk of a recession is increased. The lower index values suggest an economy that was moving in the wrong direction, but not quite in recession territory yet.
One of the larger factors in the decline was the decrease in industrial production, which fell 0.4 percent in October. Reduced output due to Hurricane Sandy was a major reason for this decrease, but it is also true that manufacturing production was off 1.7 percent since July. There have been significant weaknesses for the past few months even before the hurricane, with soft sales and uncertainties related to the U.S. fiscal situation. Reduced housing permits also provided a drag on the NAI.
One of the larger positive contributions came from higher nonfarm payrolls. There were 171,000 additional workers hired in October, with 13,000 new manufacturing employees.
Overall, the Chicago Fed’s National Activity Index suggests that the U.S. economy continues to struggle, growing below its historical trend. As the attached chart shows, the 3-month moving average has moved progressively lower since February (when it stood at 0.45). This is definitely a trend that needs to be reversed.
Chad Moutray is chief economist, National Association of Manufacturers.