Friday, January 30, 2009

ALERT: M1 nsa Money Growth Collapses

After growing at annualized rates near 40%, three month M1 nsa money growth numbers (for the week ended Jan 19) climbed at a three month annualized rate of only 3.04%

One week does not make a trend, but we have consistently said that a key datapoint to watch would be M1 money growth, as a slowdown in growth of this number would indicate fear is subsiding--and corporations and individuals are not adding to their cash balances. This may be an early indicator that such may be occurring. It will be very important to watch this number closely in upcoming weeks.

One word of caution, the pre-Christmas period is a period of strong demand for cash, part of the slowdown may be a return to normal non-Christmas cash levels. When the Fed seasonally adjusts its numbers, M1 is growing at a healthy clip of 34%. But even a normal return to non-Christmas cash levels is a sign the flight into cash has stopped.

That said, if this collapsing trend in non-seasonally adjusted M1 continues (while M2 nsa continues to grow at double digit rates), I will be prepared to say the worst is over for the economy, on a short-term basis. Afterall, it is non-seasonally adjusted money that is ultimately working its way through the economy. Money number trends over the next 4 to 6 weeks will be very important to watch. Continued slow M1 growth and continued rapid M2 growth will signal the end of this recession. And, for one week that's what the data is pointing to.

Despite slowed M1, three month annualized M2 nsa is now growing at a remarkable 25.2%.


  1. And just to be clear, you think unemployment is going to drop over the next two months (say)?

  2. Not necessary, I don't think the correlations are that exact.

    More like we will be able to look back as economic historians and began to see different datapoints start to turn positive.

    And, remember as I pointed out, this is just one week of data, so it's not like you should sell the farm and bet everything that a turnaround will be obvious, on say, February 3.

  3. Incidentally, if you just look at the actual (biweekly I think) graph, M1 actually collapsed. (I.e. your 3-month smoothing is blending the huge spike and now the collapse.)

    I don't know what to make of this. In conjunction with the Fed's declining balance sheet, I hope it means Bernanke is quietly walking back from the abyss.