As previously discussed, a rise in narrow money supply might lead to a rise in economic activity for a number of reasons: narrower money supply measures tend to be reserved for near term expenditure and a rise might suggest a move from delaying expenditure (longer term time deposits to shorter term easily accessible accounts) to spending more.
A rise in narrow money supply may also be a sign that the money multiplier has been expanding in recent months and lending growth has fed back into the banking system (people have more money), likewise implying a) growing economic activity and b) the potential for more expenditure.
Indeed, personal incomes have been rising of late, although increases have been moderate:
As have loans and leases in bank credit, again, albeit modestly in an historical context:
But we are not in normal times and we have seen very significant increases in M1 in the US over the last few years that have subsequently proved short term in terms of economic stimulus. Narrow money supply growth has indeed been on the increase in the last few months.
And their components:
Please note that the broader measure incorporates institutional money market funds and large denominated time deposits.
Irrespective narrow money supply growth is strong, although this is not fully reflected in the growth in commercial bank liabilities to date – since Jan 2009 M1 has increased by 46% and Commerical bank liabilities by 17%.
The increase in commercial bank liabilities has been historically weak:
And while on an annual basis, growth in loans and leases has exceeded growth in liabilities:
This trend has reversed in shorter term data which means that loan growth has taken a step back and may presage a weakening in activity:
And overall, cash balances (high) and loans and leases (low) as a % of total assets remains weak:
The continuing decline in the provision of funds by the shadow banking system may also be playing some role in monetary dynamics:
Also the economy remains exposed to cut backs in fiscal expenditure given the still significant level of national income being provided for by government transfer payments:
It is not conclusive that high narrow money supply growth implies higher economic activity given the still significant structural domestic and global economic factors. Nevertheless, there may be enough in the data to stay the Federal Reserve’s hand until we see a deterioration money supply fundamentals.