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Economic activity in the United States softened at the beginning of the year, according to data released Monday by the Federal Reserve Bank of Chicago.
The Chicago Fed National Activity Index (CFNAI), a broad measure of economic momentum, declined to -0.03 in January, down from 0.18 in December, signaling that growth fell below its historical trend. A reading below zero suggests that the economy expanded at a slower-than-average pace.
Weakness in production, personal consumption, and housing contributed to the slowdown in January, according to the report. However, employment-related indicators strengthened, underscoring the continued resilience of the labor market.
Uncertainty over tax policy may also be affecting economic decisions, as businesses and households assess the potential expiration of key provisions from the 2017 Tax Cuts and Jobs Act. The possibility of higher taxes in 2026 could be leading some businesses to scale back investment, further dampening economic momentum.
Extreme weather conditions also disrupted economic activity. Wildfires in Los Angeles and winter storms in the South likely impacted retail spending, particularly in January. However, analysis of the retail sales data by Bank of America suggests that these effects were not as severe as initially expected. Spending remained strong in food services, which would typically experience greater disruptions, while nonstore retailers—which should have been less affected—saw a notable decline.
Another possible explanation for the weaker start to the year is a correction from unsustainably strong retail sales in December. Bank of America notes that seasonally adjusted control retail sales in January remained slightly higher than in November, suggesting that January’s slowdown could be a return to normal levels after an inflated holiday season.
Persistent inflation remains a concern, with recent data indicating that price pressures have not eased as quickly as anticipated. This makes it increasingly likely that the Federal Reserve will hold off on rate cuts until much later this year, as policymakers remain cautious about loosening monetary policy too soon.
Despite the monthly decline, some longer-term measures pointed to steadier conditions. The three-month moving average of the CFNAI increased to 0.03 in January, up from -0.13 in December. The CFNAI diffusion index, which gauges how broadly economic changes are occurring across sectors, also ticked higher, rising to 0.10 from -0.07 a month earlier. Historically, the economy has been in a growth phase when the diffusion index remains above -0.35.
The report offers a mixed picture of the economy’s trajectory, with pockets of strength in the labor market contrasting with softness in consumer-driven sectors.
