Some of the Federal Reserve’s districts compile and release monthly economic reports for their regions.
In the last week or two, those reports were that the Fed’s Empire State (NY) Mfg Index plunged from 12.5 in January to 4.5 in February. The Fed’s Philadelphia Region Index plunged from a positive reading of + 9.4 in January to - 6.3 in February. The Dallas Fed’s Mfg Index dropped from 3.8 in January to 0.3 in February. The Richmond Fed’s Index plummeted from +12 in January to -6 in February.
The ISM national Mfg Index plunged from 56.5 in December to 51.3 in January, just barely above the contractionary 50 level. Within the index, the monthly decline in new orders was the largest in 33 years. The Fed’s regional indexes indicate the slowdown accelerated in February.
However, the Fed does not seem to think its indexes are of any importance. It says the economy continues on its recovery track.
Unlike in 2010, 2011, and 2012, the stock market also seems to believe this time around that negative reports are of no importance.
But when Friday morning’s release of the Chicago PMI Mfg Index showed it ticked up imperceptibly from 59.6 in January to 59.8 in February, and although remaining at a two-year low Pending Home Sales ticked up 0.1% in January, the stock market took off.
The Fed also utilizes a major measurement of national business activity, the Chicago Fed’s National Activity Index (CFNAI). It is a composite of 85 selected economic indicators that the Chicago Fed’s website says, “are drawn from four broad categories of national data: production and income; employment, unemployment, and hours; personal consumption and housing; and sales, orders, and inventories. Each of these data series measures some aspect of overall macroeconomic activity. The CFNAI provides a gauge of current and future economic activity and inflation in the U.S.”
A composite of 85 individual measurements designed to pull together the individual monthly economic reports. If ever there was an indicator of importance to the Fed that would be it, right?
Apparently not. The index is designed to hover closely around 0, a positive number indicating growth, a negative number indicating economic contraction. The Fed even says if the three-month moving average of the index declines to - 0.70 the economy has slowed so much “it indicates a recession has begun.”
The Fed’s CFNAI collapsed from +0.73 in November to -0.03 in December. The Fed reported this week that it plunged further into negative territory at -0.39 in January.
However, that did not seem to even register in the Fed’s continuing assessment that the economic recovery continues “at a moderate pace.”
Why bother compiling all this data to produce these regional and national indexes if they mean nothing, are even meaningless to the Fed?
The Commerce Department reported on Friday that GDP growth in the fourth quarter was not 3.2% as it originally reported, but only 2.4%. That is a substantial decline from the 4.1% growth of the third quarter.
Meanwhile, if they can be believed, the economic reports for January and February, including the Fed’s own indicators noted above, as well as reports on retail sales, factory output, employment reports, housing reports, and so on, indicate the first two months of the current quarter tracked well below the downwardly revised fourth quarter.
Wall Street firms and major banks continue to slash their forecasts for the economy. They got it right that 4th quarter GDP would be revised down from 3.2% to around 2.5%. Their forecasts for the current quarter, prior to this week’s reports, seemed to range between 1.5% and 1.8%.
In 2010, 2011, and 2012, the Fed rushed in with additional new QE stimulus when economic reports indicated the economic recovery was stumbling. This time around, it seems unperturbed even though its own indexes confirm the negative reports from virtually every corner of the economy.
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In 2010, 2011, and 2012 the S&P 500 fell 17%, 19.5%, and 11% respectively when economic reports indicated the economy was stumbling. This time around, investors are not at all nervous. Unperturbed by the reports, the S&P 500, and particularly the Nasdaq, managed only minor pullbacks in January before roaring back to new highs, even as the economic reports worsened.
Is it really different this time? Do economic reports mean nothing this time? The stock market thinks so.
Does the Fed also think so, or is it waiting for the market? In those prior years, it waited until the stock market had declined by double digits before rushing in almost in panic with more massive QE to rescue the economy.
