US economic activity decelerated more than expected in August, according to this morning’s update of the Chicago Fed National Activity Index. The three-month average for the business cycle benchmark (CFNAI-MA3) declined to +0.07 for last month’s reading vs. a revised +0.20 for July. The latest figures still reflect an “above-trend” pace of growth for the world’s biggest economy, according to the Chicago Fed. Nonetheless, today’s release raises more doubts about the recent assumption that the US economy is accelerating.
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US economic growth will decelerate in the third quarter, according to The Capital Spectator’s median econometric nowcast. Today’s revised GDP estimate anticipates an increase of 2.2% (real seasonally adjusted rate) for the July-through-September period—down sharply from the 4.2% pace in the previous quarter, according to the Q2 report published by the Bureau of Economic Analysis (BEA) in late-August.
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● American Power After The Financial Crisis
By Jonathan Kirshner
Summary via publisher (Cornell University Press)
The global financial crisis of 2007–2008 was both an economic catastrophe and a watershed event in world politics. In American Power after the Financial Crisis, Jonathan Kirshner explains how the crisis altered the international balance of power, affecting the patterns and pulse of world politics. The crisis, Kirshner argues, brought about an end to what he identifies as the “second postwar American order” because it undermined the legitimacy of the economic ideas that underpinned that order—especially those that encouraged and even insisted upon uninhibited financial deregulation. The crisis also accelerated two existing trends: the relative erosion of the power and political influence of the United States and the increased political influence of other states, most notably, but not exclusively, China.
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The three-month average of the Chicago Fed National Activity Index (CFNAI) is expected to rise slightly to +0.29 in Monday’s update for August, according to The Capital Spectator’s median econometric point forecast. The projection is marginally above July’s +0.25 reading, which reflected above-average economic growth relative to the historical trend. Only values below -0.70 indicate an “increasing likelihood” that a recession has started, according to guidelines from the Chicago Fed. Based on today’s estimate for August, CFNAI’s three-month average is expected to remain at a level that’s historically associated with growth at a moderately above-trend pace.
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The latest economic releases look wobbly in some corners–yesterday’s report on housing starts, for example. But the monthly comparisons for several indicators, although weak, appear to be noise at this time in terms of evaluating the business cycle. Indeed, reviewing macro conditions across a broad set of figures still points to growth. True, the outlook for expecting an acceleration in economic activity has fallen on hard times again. But the moderate expansion that’s prevailed lately will likely roll on, based on the August update of a diversified set of 14 economic and financial indicators.
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I’m off to Manhattan, where I’m a panelist at today’s 360 Exchange conference hosted by Bloomberg. My session focuses on volatility in macro and markets. My co-panelist is Dan Farley, chief investment officer for the investment solutions group at State Street Global Advisors. The usual routine for The Capital Spectator resumes tomorrow.

Housing starts are expected to decrease to 1.050 million in tomorrow’s update for August, based on The Capital Spectator’s median econometric point forecast (seasonally adjusted annual rate). The projection represents a marginal decline from 1.093 million starts in July.
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Volatility is starting to creep back into the markets. It’s not obvious from the 30,000-foot view, but a few corners of the global markets are becoming jittery. Exhibit A: US real estate investment trusts (REITs), which tumbled sharply in recent sessions, presumably on the fear that this interest-rate sensitive asset class is vulnerable if the Fed is getting close to hiking interest rates.
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When the dust clears from tomorrow’s Fed announcement, the crowd’s expecting that the slow but persistent pace of tapering will endure. While we’re waiting for Wednesday’s monetary statement, revised set of economic projections, and press conference, consider that the real (inflation-adjusted) year-over-year increase in the monetary base continues to decelerate. That’s not surprising at this point, but it’s a clear signal that monetary stimulus is still moving closer to normalization.
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The trend in recent years of securitizing more of the world’s market betas offers investors, in theory, better odds for enhancing risk-adjusted returns. Providing access to a broader set of assets with low/negative correlations moves us closer to the ideal of building optimal portfolios. In practice, however, juicing results is messy. One challenge is the grey area of developing reasonable expectations for relatively “new” betas that come down the pike. Tapping into a previously obscure market via an ETF, for instance, can be a good thing, but sometimes it’s unclear what to expect due to limited historical data. For some folks, that’s a reason to steer clear. But playing it safe comes with its own set of risks. The question, then, is how does one develop a comfort level with new products that don’t have a long track record as investable portfolios? The short answer: carefully, methodically, and with several techniques, including a bit of statistical modeling.
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