U.S. Economy Takes One Step Forward and Half a Step Back

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The National Activity Index (CFNAI), published by Federal Reserve Bank of Chicago, has given a mixed reading of the economic pulse for the month of May. Housing and labor markets remained a pain in the back for the economy, but industrial activity seems to have gained momentum.

The Chicago Fed National Activity Index is a weighted average of 85 economic indicators ranging from production, income, consumption, employment to sales, inventories, and housing — a broad matrix of overall economic performance can be gleaned through these indicators. A positive index signals that the economy is growing above the historical trend growth, and a negative index indicates economic growth has slowed below historic trends.

According to data released on Monday morning, the CFNAI increased to +0.21 in May from -0.15 in April, indicating that economic activity is picking up after a long and unproductive winter. But the confusing bit is this: The CFNAI three-month moving average (CFNAI-MA3), which is a more consistent indicator of growth, as it irons out short term volatilities, has shrunk to +0.18 from +0.31 in April. Although this is the third consecutive month that the index is above zero, the reading suggests that economy is set to grow, but the pace may dawdle.

“The economic growth reflected in this level of the CFNAI-Monthly Average 3 months suggests limited inflationary pressure from economic activity over the coming year,” the report says. One conclusion that can be safely drawn is that the slight inflationary pressure seen in the system currently — with the consumer price index having risen for three straight months now and a year-on-year increase of 2.1 percent as of May — is more a result of an accommodative or easy money monetary policy.

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