While economic numbers like GDP or the monthly non-farm payroll report typically garner the headlines, the most useful statistic in my opinion– the Chicago Fed National Activity Index (CFNAI) – often goes ignored by investors and the press.
That may be a mistake. Markets have run up sharply in recent months partly on the assumption that US economic growth is going to accelerate later this year and translate into faster earnings. But if recent CFNAI readings are any indication, investors may want to alter their growth assumptions for the third and fourth quarters.
Unlike backward-looking statistics like GDP, the CFNAI is a forward looking metric that gives some indication of how the economy is likely to look in the coming months.
And of all the indicators I’ve tested, the CFNAI has the best track record of forecasting future GDP. Since 1980 the CFNAI has explained roughly 40% of the variation in the following quarter’s GDP, an extremely high proportion for a single indicator.
So what has the CFNAI shown lately? The indicator has been negative for the past few months. And last week, it plunged to -0.52 for April, as the chart below shows.