US economic activity increased sharply in January according to the Chicago Federal Reserve's National Activity Index. The index’s three-month moving average, which provides a more consistent picture of national economic growth than monthly data, increased to –0.16 in January from –0.47 in December, reaching its highest level since July 2007.

The Chicago Fed says January’s index suggests that, consistent with the early stages of a recovery following a recession, growth in national economic activity is beginning to near its historical trend. The index is a weighted average of 85 indicators of national economic activity. The indicators are drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories. A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

Production-related indicators made a positive contribution to the index for the seventh consecutive month. As a group, they contributed +0.45 in January, up from +0.14 in December. Manufacturing industrial production increased 0.9 percent in January after being unchanged in December; and manufacturing capacity utilization increased to 69.2 percent in January, its highest level since November 2008.

The sales, orders, and inventories category made a positive contribution to the index for the fifth consecutive month. This category of indicators contributed +0.04 in January, up slightly from +0.03 in December. The Institute for Supply Management’s Manufacturing Purchasing Managers’ New Orders Index increased to 65.9 in January from 64.8 in December, reaching its highest level since December 2004.

Employment-related indicators contributed –0.01 to the index in January, up from –0.26 in December. Payroll employment decreased by 20,000 in January after declining by 150,000 in December; and the unemployment rate declined to 9.7 percent in January from 10.0 percent in the previous month.

The consumption and housing category continued to be the weakest component of the index. This category of indicators contributed –0.45 in January, up modestly from –0.49 in December. Housing starts increased to 591,000 annualized units in January from 575,000 in December. Partially offsetting this was a decrease in building permits to 621,000 annualized units in January from 653,000 in the previous month.

Fifty of the 85 individual indicators made positive contributions to the index in January, while 35 made negative contributions. Fifty seven indicators improved from December to January, while 28 indicators deteriorated. Of the indicators that improved, 16 made negative contributions. The index was constructed using data available as of February 18, 2010. At that time, January data for 52 of the 85 indicators had been published. For all missing data, estimates were used in constructing the index.