M2 velocity is stalling in Q2, bankruptcies kept climbing

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M2 Velocity Points to 70% Recession Risk

I really want to break this down because the shape developing in M2 velocity becomes much more important when you compare it with what is happening underneath the economy.

What The Charts Are Showing

The long term chart shows a recurring pattern. Velocity tends to rise during expansions, lose momentum, form a rounded top, then roll over as economic activity weakens.

The latest sequence is

1.395
1.407
1.409
1.413
1.415

Velocity is still rising, so the rollover is not confirmed. But the gains have become extremely small. Acceleration is increasingly turning into a plateau.

M2 velocity is nominal GDP divided by M2. When velocity rises, nominal activity is growing faster than the money supply. When it flattens, that advantage is disappearing. When it falls, money balances are expanding faster than the economy can turn them into activity.

Why The Rounded Top Matters

The important part is the inertia behind that shape.

Businesses preserve cash. Banks tighten lending. Households become more cautious. Investment slows. Refinancing becomes harder. Delinquencies and bankruptcies rise.

Those behaviors reinforce one another.

Once velocity genuinely rolls over, reversing it requires nominal activity to begin outrunning M2 again through stronger spending, hiring, investment and credit creation.

That is why a real rounded top often becomes a multi quarter decline instead of immediately bouncing.

The GDP Number Needs Context

Q2 real GDP grew 1.5% and real final sales to private domestic purchasers increased 4.2%, so the private economy was not broadly contracting through June.

But the composition was uneven.

Services carried much of the strength, with healthcare led by hospitals and physician services contributing heavily to the upward revision. Goods spending was revised lower, imports higher and structures remained weak.

Current dollar GDP grew 8.0% while real GDP increased only 1.5%, showing how much stronger nominal activity was than actual real output.

So the headline remained positive while more cyclical parts of the economy were already softening.

What Is Weakening Underneath

• Subchapter V filings rose 50% year over year
• Commercial Chapter 11 filings rose 28%
• Household debt is near $18.8 trillion
• Consumer delinquencies remain elevated
• Hiring and labor churn are weak
• Refinancing remains expensive
• M2 is expanding again while velocity barely improves

None of these mechanically lowers velocity, but they encourage exactly the defensive behavior that eventually does.

Then Another Shock Arrived

The velocity data stop in June.

They do not include the September Fed hike, the newest diesel shock or most of the deterioration developing through Q3.

Velocity was already losing momentum before another restrictive impulse arrived.

Now businesses face higher energy costs and tighter financing at the same time. The Fed cannot create diesel or repair supply chains. It can only weaken demand enough to offset the inflation.

Why Revisions Matter

GDP and M2 are seasonally adjusted, and velocity inherits revisions to both.

If later benchmark data show employment, income or nominal GDP were weaker than first estimated, historical velocity can be revised lower too.

What looks like a plateau today could eventually look more like the beginning of the rollover in hindsight.

Where We Stand

M2 velocity alone does not prove recession.

But the shape is developing alongside the credit, labor, bankruptcy, refinancing and energy pressures capable of creating the inertia behind a sustained decline.

I put recession risk at roughly 70% that the US is heading into recession, if it has not already begun and simply has not yet appeared clearly in the backward looking data.

If velocity turns lower while M2 expands and labor, credit and real consumption weaken, these charts may have been showing where the economy was heading before official data caught up.

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