The Chicago Federal Reserve Bank said that its National Activity Index (NAI) increased from -0.52 in April to -0.30 in May. While there was some progress in this index at the beginning of the year, this was the third consecutive month with the NAI in negative territory. Negative numbers indicate that the U.S. economy is growing below its historical trend, and when the 3-month moving average falls below -0.70, the risk of recession is increased.
Despite the higher monthly NAI, the 3-month moving averaged moved lower, down from -0.13 to -0.43 for the month. This is largely a function of losing February’s positive gains in the calculation. The current data suggest that there was modest progress in May, but the macroeconomic environment remains subpar. Still, the likelihood of recession is low.
Manufacturing was a drag on the NAI, with industrial production unchanged in May and the Institute for Supply Management’s purchasing managers’ index contracting for the first time since November. Production-related measures subtracted 0.10 points from the NAI as a result. That is better, though, than the 0.34 points that it decreased the NAI in April, when industrial production had fallen by 0.5 percent. Nonfarm payroll growth made a slight positive contribution, while lower housing permits and a still-struggling (but much improved) residential sector provided a drag of 0.17 points.
This data is largely consistent with the Conference Board’s Leading Economic Index, which was released last week, despite the different methodologies. Both sets of analysis point to an economy that made some modest progress in May, but with significant challenges still present. Sluggish manufacturing growth has been one of those weaknesses, with slowing global sales and weaker domestic demand challenging growth.