Friday, July 9, 2010

An Uptick in Money Supply Growth and What It Means

The Fed money growth numbers don't reflect it as strongly, yet. They show 3 month seasonally-adjusted annualized M2 money growth at 2.0%, versus 6 month growth of 0.9%.

But I prefer to look at non-seasonally adjusted, 13 week smoothed, M2 money growth, which is now at 3.4%. This is not huge money growth, certainly not enough to turn the economy around, but it is noteworthy, since money growth had been under 1%.

If M2 annualized growth climbs above 5%, and most certainly if it gets close to 10%, then it will be time to re-adjust economic forecasts. This may mean calling for an end to the recession, and bringing out the inflation warning T-shirts. It's too early to do this now, but it is a possibility down the road that investors and business decision makers should be aware of.


  1. We're entering that critical part of the year where a failure of M2 to uptick materially warns of serious potential danger in the Sep-Nov time frame. There's no QE funny money this year as a backstop, either (as we had last year). I know this is all model-based stuff, so take it with a grain of salt, but risk markets need funny money to rally against a backdrop of very bearish projected fundamentals.

  2. Actually, Bob I think it is more than modeled based stuff. As I have argued in the past, Austrian Business Cycle Theory may offer a clue in that the Sept-Nov period is what I would consider to be the "consumer period" of the year. There's demand for school clothes, winter clothes and Christmas gifts. Most retailers, as you know, do a good majority of their business in this period.

    Thus stockmarket downturns are most likely in this period because of this "natural" flow away from investment and toward consumption.

  3. Two questions for you:
    • Why did you use the percentage changes from the "weekly" data (table 2) rather that the "monthly" data (table 1).
    • Where did the 3.4% growth number come from? I couldn't find it in the data. How was it calculated?

  4. I didn't use weekly data. I used 13 week average, simply because week to week data can be very volatile.

    3.4% comes from the 3-month non-seasonal data annualized