Today’s release of the Chicago Fed National Activity Index (CFNAI) was less than impressive and rolled the STA Economic Output Composite lower. The CFNAI index fell to a negative 0.45 in April (negative numbers show economic contraction) which is the lowest for the reading for the index August. The April read also shows contraction from March’s revised reading of a positive 0.32.
While the index reading was poor it is also in line with the recent releases of the Institute of Supply Management Services and Manufacturing Indexes, the Empire Manufacturing Index and the Philadelphia Fed Business Outlook Survey which adds fuel to our assumptions that we have seen the peak in the recent economic recovery.
The STA Economic Output Composite Index is a combined and weighted index of the ISM Manufacturing and Service Sectors, the Philly Fed Index, the Chicago Fed National Activity Index and the Empire State Manufacturing Index. The index has fairly good track record of tracking the growth and declines of the Gross Domestic Product the recent sharp decline in the composite index is indicating a weaker economic posting in the 2nd and 3rd Quarter of this year, absent the inflow of QE 3, and will also most likely press both corporate profit margins and market performance.
As we stated in this past weekends newsletter we need to lower exposure to overall portfolio equity risk for the summer months as the withdrawal of QE 2 combined with Eurozone issues, debt ceiling arguments and political posturing and a potential peak in profit margins weighs on overall market performance.