This article discusses how the Chicago Fed National Activity Index has performed as a “real-time” indicator of economic activity and related inflationary pressure.

R. Andrew Butters

Scott Brave

English

Research Papers in Economics

Chicago Fed National Activity Index turns ten—Analyzing its 
first decade of performance
by Scott Brave, business economist, and R. Andrew Butters, associate economist
This article discusses how the Chicago Fed National Activity Index has performed as a 
“real-time” indicator of economic activity and related inflationary pressure.
The Chicago Fed National Activity Index 
(CFNAI) is a monthly index constructed 
to summarize variation in 85 data series 
on U.S. economic activity.1 It is also an 
example of a “Goldilocks” index, reflect-
ing deviations around a trend rate of 
economic growth represented by a 
zero value of the index. Zero is “just 
right” and suggests that the U.S. econ-
omy is proceeding along its historical 
growth path; a negative value is “cold” 
and suggests that growth is below aver-
age; and a positive value is “hot” and 
suggests that growth is above average. 
The ability of the CFNAI to capture sus-
tained deviations from trend in economic 
activity has led to its frequent use as an 
indicator of business cycles.2 However, 
the CFNAI was originally suggested as 
an indicator for forecasting inflation, 
based on the relationship between de-
viations in economic activity from trend 
and the level of economic slack in the 
U.S. economy.3 The more slack (or the 
more negative the index value), generally 
the less upward pressure there is on prices; 
conversely, the less slack (or the more 
positive the index value), the more up-
ward pressure there is on prices. 
In this Chicago Fed Letter, we examine how 
the CFNAI has performed as an indica-
tor of both economic activity and related 
inflationary pressure since its initial re-
lease in March 2001. With the index 
reaching its tenth year of publication, 
we now have a reasonable sample with 
which to judge its ability to identify re-
cessions and periods of sustained increas-
ing inflation as they are happening. 
Now we can also more reliably assess its 
ability to forecast common measures of 
economic growth, such as gross domestic 
product (GDP), and measures of infla-
tion, like the Personal Consumption 
Expenditures (PCE) Price Index. We 
find that, overall, the CFNAI has proven 
to be a useful indicator for both purposes 
over the past decade.
Identifying business and inflation cycles
The CFNAI can be very volatile, since 
many of the monthly series that make up 
the index vary significantly from month 
to month. For this reason, the release 
of the monthly index is accompanied 
by a three-month moving average index, 
i.e., the CFNAI-MA3 , which smoothes 
these month-to-month variations over 
time and provides a more consistent 
picture of variations in economic growth 
around trend. When the CFNAI-MA3 
reaches certain levels that have been 
identified in previous research as “too 
hot,” the likelihood of a period of sus-
tained increasing inflation rises; when 
it gets “too cold,” the likelihood of a 
recession rises. 
For instance, a CFNAI-MA3 value below 
–0.7 after a period of economic expan-
sion indicates an increasing likelihood of 
a recession, as substantial resource slack 
begins to build up in the U.S. economy. 
Conversely, a value above –0.7 after a 
Chicag  o Fed Letter
ESSAYS ON ISSUES                                               THE FEDERAL RESERVE BANK  APRIL 2010
  OF CHICAGO                                                          NUMBER 273
Entering its tenth year, the 
CFNAI has proven to be a 
useful real-time indicator of 
economic activity and related 
inflationary pressure.period of economic contraction indi-
cates an increasing likelihood that a 
recession has ended, as idle resources 
begin to be put back to use. 
The history of the CFNAI-MA3 shown 
in fi  gure 1 demonstrates that, based on 
these thresholds, the index has been 
successful in identifying the beginnings 
and ends of U.S. recessions since 1967 
within one to three months of the dates 
determined by the National Bureau of 
Economic Research (NBER). Of course, 
identifying recessions as they are hap-
pening is much trickier. Important 
data may not yet be 
available, and the 
data that have been 
released are often 
subject to revision. 
As a result, the NBER 
typically determines 
the beginning and 
end dates of business 
cycles several quarters 
after the event. With 
its monthly release 
schedule, the CFNAI 
serves as a “real-time” 
measure of  the 
business cycle. 
In fact, for the 2001 
recession, the 
CFNAI-MA3 identi-
fi  ed the start of the 
recession as December 
2000 in the March 5, 
2001, release. Ten 
months later, the 
NBER identifi  ed the 
start date of the reces-
sion as March 2001. 
The CFNAI-MA3 
then identifi  ed the 
end of the 2001 re-
cession as February 
2002 in the March 27, 
2002, release. Sixteen 
months later, the 
NBER put the end 
date at November 
2001. The index’s real-
time performance 
during the recent 
recession has been 
even better. In the 
March 24, 2008, re-
lease, the CFNAI-MA3 correctly identi-
fi  ed December 2007 as the recession’s 
start date, eight months before the 
NBER announcement doing the same. 
While the NBER has yet to identify this 
recession’s end, the CFNAI-MA3 iden-
tifi  ed the likely end date as September 
2009 in the October 26, 2009, release. 
Using the index to identify periods of 
sustained increasing infl  ation is more 
diffi  cult. A formal arbiter of such periods, 
like the NBER, does not exist. Instead, 
we rely on an algorithm that looks for 
substantial increases in measures of core 
infl  ation (which ignore more volatile 
food and energy prices) to identify these 
dates.4 If we compare them against the 
CFNAI-MA3 as shown in fi  gure 2, we 
see that the timing of such signals from 
the index is often not precise. Unlike 
business cycles where false positive sig-
nals tend to be rare, the index has shown 
several false positive signals of increas-
ing infl  ation in its history. Still, it has 
generally been true that when the 
CFNAI-MA3 has increased above +0.7 
more than two years into an economic 
expansion, infl  ation has increased sub-
stantially over the following year. 
Since its initial release, the CFNAI-MA3 
has exceeded +0.7 only twice in real time: 
for the months of May 2004 (in the 
June 28, 2004, release) and December 
2005 (in the January 23, 2006, release). 
In subsequent releases, the May 2004 
value of the index was revised below 
+0.7, while the December 2005 value 
remained above +0.7. These months cor-
respond with the month leading up to 
and the middle month of this past de-
cade’s lone period of sustained increasing 
infl  ation that we identify. This contrasts 
with the previous decade where +0.7 had 
been reached on several separate occa-
sions without a subsequent sustained 
rise in infl  ation. 
Forecasting GDP growth and core 
PCE inflation
To further demonstrate the usefulness of 
the index, we compared the CFNAI-MA3’s 
ability to forecast current quarter real 
GDP growth within each quarter from 
2001:Q1 through 2009:Q4 relative to 
forecasts based on other well-known 
monthly indicators of economic activity.  
We then did the same for the change in 
core infl  ation, as measured by the PCE 
defl  ator excluding food and energy 
prices. All of our forecasts were made in 
a real-time sense, using the actual data 
on real GDP, core PCE, the CFNAI-MA3, 
and the other monthly indicators avail-
able at the time the current quarter 
forecasts would have been made.5  
Real GDP and core PCE are both quar-
terly measures. Still, each of these series 
has a pseudo-monthly release schedule 
incorporating two rounds of revisions 
after an initial release; so, if we count 
2. CFNAI-MA3 and inflation cycles
NOTES: CFNAI-MA3 is the Chicago Fed National Activity Index’s three-month moving 
average. Shading represents periods of substantial inflation increases. A CFNAI-MA3 
value above +0.70 more than two years into an economic expansion indicates an 
increasing likelihood that a period of sustained increasing inflation has begun.
index
1970 ’75 ’80 ’85 ’90 ’95 2000 ’05
−4
−3
−2
−1
0
1
2
+0.7
1. CFNAI-MA3 and business cycles
NOTES: CFNAI-MA3 is the Chicago Fed National Activity Index’s three-month moving 
average. Shading indicates official periods of recession as identified by the 
National Bureau of Economic Research; the dashed vertical line indicates the 
most recent business cycle peak. A CFNAI-MA3 value below –0.70 following a 
period of economic expansion indicates an increasing likelihood that a recession 
has begun. Conversely, a CFNAI-MA3 value above –0.70 following a period of 
economic contraction indicates an increasing likelihood that a recession has ended.
index
1970 ’75 ’80 ’85 ’90 ’95 2000 ’05
−4
−3
−2
−1
0
1
2
−0.7the revisions, each is released within a 
quarter the same number of times as 
the CFNAI-MA3. The CFNAI-MA3 is a 
timelier indicator of economic activity; 
both real GDP and core PCE experience 
a lag of one to three months between 
the time period they describe and the 
date they are released, whereas the  
CFNAI-MA3 and all of our monthly in-
dicators lag by only one month. This fact 
makes it possible to produce current 
quarter forecasts for each of the three 
releases within the quarter, using the 
previous quarter’s data on real GDP and 
core PCE, along with current quarter 
data on the monthly indicators.
For instance, in any given month when 
the CFNAI is released, all of the monthly 
indicators we examine incorporate data 
up to one month prior to the date of this 
release. In contrast, the real GDP and 
core PCE release that corresponds with 
this same month incorporates data only 
through the previous quarter. To create 
our current quarter forecasts, we aligned 
within the quarter the last available value 
of real GDP growth and the change in 
core PCE inflation to the monthly data in 
accordance with this release schedule. 
In this way, we used monthly indicators 
from the first month of a quarter to pre-
dict the first release of real GDP and core 
PCE, the same indicators from the second 
month to predict the second release, 
and the same indicators from the third 
month to predict the third release.
To obtain our monthly forecasts, we then 
ran a series of regressions of real GDP 
growth and the change in core PCE in-
flation on one of their own lags and the 
contemporaneous value and up to five 
lags of each of the monthly indicators, 
where the number of lags was chosen 
by the Bayesian Information Criterion.6 
The sample period for these rolling 
regressions began in 1967 and extended 
to the date of each CFNAI release 
over the past decade, ending with the 
November 23, 2009, release (October 
2009 being the latest period for which we 
have matching GDP and PCE data for 
our forecasts).7 Using the coefficients 
from this regression, we then projected 
forward one quarter using the real-time 
data to obtain a current quarter forecast. 
Figure 3 reports our results.8 As a bench-
mark, we used a “random walk” forecast 
that specified that real GDP growth or 
core PCE inflation would be the same 
as in the previous quarter. The evaluation 
criterion we use in figure 3 is the ratio of 
the mean squared forecast error (MSFE) 
of each indicator’s forecast relative to the 
random walk forecast. A value below 1 
indicates that the indicator forecast out-
performed the random walk forecast, 
while a value above 1 indicates it under-
performed. We consider two subsamples: 
2001:Q1–2003:Q4 and 2004:Q1–2009:Q4. 
We do this to account for the fact that 
in November 2003 we replaced several 
of the original 85 CFNAI data series. 
For 2001–03, the CFNAI-MA3’s GDP fore-
casts are relatively weak compared with 
those for production indicators, such as 
industrial production and manufactur-
ing capacity utilization (first row of fig-
ure 3). However, the relatively poor 
performance of the CFNAI-MA3 during 
this period was driven substantially by 
large forecast errors in 2003:Q2. This 
represents the lone quarter in the past 
decade that the index registered a false 
positive in signaling an increasing like-
lihood of a recession. During that time, 
the forecasts from several nonproduction 
indicators underperformed relative to the 
index and even random walk forecasts. 
In contrast, all of the monthly indica-
tors demonstrate much improved fore-
casting performance over the period 
2004–09, when GDP growth was partic-
ularly volatile (second row of figure 3). 
The CFNAI-MA3 forecasts more accu-
rately than all of the other indicators, 
with the exception of manufacturing 
capacity utilization, which performs just 
slightly better. Looking at just the first 
GDP release within each quarter, the 
CFNAI-MA3 forecasts are roughly on 
par with the Philadelphia Fed’s Survey 
of Professional Forecasters (SPF) median 
quarterly forecasts.9
The CFNAI-MA3’s performance as an 
inflation indicator during this ten-year 
period is less impressive, but it’s not un-
like that of a number of other common 
inflation indicators. The results in fig-
ure 3 (third and fourth rows) are not sig-
nificantly different across the indicators, 
but they are uniformly lower than the 
CFNAI-MA3’s in the 2004–09 period. The 
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Vice President, financial studies; Jonas D. M. Fisher, 
Vice President, macroeconomic policy research; Daniel 
Aaronson, Vice President, microeconomic policy research; 
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Editors; Rita Molloy and Julia Baker, Production 
Editors; Sheila A. Mangler, Editorial Assistant.  
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Research Department of the Federal Reserve Bank 
of Chicago. The views expressed are the authors’ 
and do not necessarily reflect the views of the 
Federal Reserve Bank of Chicago or the Federal 
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3. Within-quarter forecast performance
  CFNAI-MA3  IP  CUMFG  EM  LR  LRMANUA  ISM  HST
  (MSFE relative to random walk forecast)
Real GDP growth  2001–03  0.66  0.56  0.36  0.70  0.85  0.98  1.22  0.83
  2004–09  0.36  0.47  0.34  0.54  0.68  0.66  0.87  0.49
Δ Core PCE inflation  2001–03  0.90  0.91  0.91  0.91  0.87  1.09  0.94  0.98
  2004–09  0.91  0.83  0.83  0.89  0.86  0.88  0.82  0.90
Notes: This figure reports the MSFE (mean squared forecast error) of each monthly indicator’s forecast of current quarter GDP growth 
and the change in core PCE inflation relative to a random walk forecast. The random walk forecasts specify that the current quarter 
log annualized growth of real GDP and core PCE will be the same as in the previous quarter. Prior to estimation, all of the monthly 
indicators were transformed in a manner similar to the CFNAI-MA3 by taking a three-month moving average before a stationary 
transformation was applied. This transformation involved taking the log difference of industrial production (IP) and payroll employment 
(EM); the arithmetic difference of manufacturing capacity utilization (CUMFG), unemployment rate (LR), and average weekly hours 
worked in manufacturing (LRMANUA); and the log of housing starts (HST). No stationary transformation was made to the Institute for 
Supply Management’s Purchasing Managers’ Index (ISM).
sources: Authors’ calculations based on data from the Federal Reserve Bank of Chicago and the Federal Reserve Bank of Philadelphia.index does, however, outperform the 
random walk forecast; and only the un-
employment rate outperforms the index 
in both subsamples. In general, the in-
dex’s performance puts it on par with 
other common measures of economic 
slack, such as the unemployment rate 
and manufacturing capacity utilization. 
Conclusion
Entering its tenth year, the CFNAI has 
performed reasonably well as a real-time 
indicator of economic activity and related 
inflationary pressure. In conjunction with 
the publication of this article, we are releas-
ing the complete real-time history of the 
index. We hope this will encourage addi-
tional research on its real-time properties.10  
1 For details, see www.chicagofed.org/cfnai. 
2 Charles L. Evans, Chin Te Liu, and Genevieve 
Pham-Kanter, 2002, “The 2001 recession 
and the Chicago Fed National Activity 
Index: Identifying business cycle turning 
points,” Economic Perspectives, Federal Reserve 
Bank of Chicago, Vol. 26, No. 3, Third 
Quarter, pp. 26–43; and Scott Brave, 2009, 
“The Chicago Fed National Activity Index 
and business cycles,” Chicago Fed Letter, Federal 
Reserve Bank of Chicago, No. 268, November.
3 James H. Stock and Mark W. Watson, 
1999, “Forecasting inflation,” Journal of 
Monetary Economics, Vol. 44, No. 2, October, 
pp. 293–335; and Jonas D. M. Fisher, 
2000, “Forecasting inflation with a lot of 
data,” Chicago Fed Letter, Federal Reserve 
Bank of Chicago, No. 151, March. 
4 This algorithm is described in detail at 
www.chicagofed.org/digital_assets/ 
publications/cfnai/background/ 
cfnai_background.pdf.
5 We obtained the real-time GDP and PCE 
inflation data from the Federal Reserve 
Bank of Philadelphia’s real-time database 
at www.phil.frb.org/research-and-data/
real-time-center. We focus on quarterly 
PCE inflation instead of the monthly value 
in order to make use of real-time data. We 
took real-time data for the CFNAI and each 
of the monthly indicators from our own 
CFNAI archives.
6 Real GDP growth was de-meaned prior to 
estimation by using estimates of the mean 
shifts prior to 2001 implied in Robert J. 
Gordon, 2003, “Exploding productivity 
growth: Context, causes, and implications,” 
Brookings Papers on Economic Activity, Vol. 34, 
No. 2, pp. 207–298.
7 The CFNAI archives begin in March 2001. 
As a result, the unemployment rate, housing 
starts, average weekly hours worked in 
manufacturing, and the Institute for Supply 
Management’s Manufacturing Purchasing 
Managers’ Index forecast results do not 
include January and February of 2001. The 
other series were obtained for these months 
by using the Federal Reserve Bank of 
Philadelphia’s real-time database.
8 We excluded forecast months that were 
impacted by benchmark revisions to GDP. 
We also considered excluding forecasts 
impacted by annual revisions to GDP; how-
ever, doing so did not much alter the results.
9 The SPF forecasts are available only once 
each quarter and most closely correspond 
to the first release of real GDP and core PCE.
10  The full real-time history of the CFNAI 
can be found at www.chicagofed.org/ 
digital_assets/others/research/data/ 
cfnai/cfnai_realtime.xls.

Chicago Fed National Activity Index turns ten - analyzing its first decade of performance

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Chicago Fed National Activity Index turns ten - analyzing its first decade of performance

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