Money Supply data suggest it will be a weak start to 2019 for the US economy

by Shaun Richards

We have an opportunity to take a look in detail at the US economy which stands out at the moment at a time of slowing economies elsewhere. Partly of course that is due to the shut down of government offices which means that we do not have economic growth or GDP data for the last quarter of 2018, but also because it had a better trajectory anyway that Europe or Japan. We get some clues from the Minutes of the January meeting of the US Federal Reserve and let me open with some old friends that rarely get a mention these days.

Standing dollar liquidity swap arrangements with
the following foreign central banks: Standing foreign currency liquidity swap arrangements with the following foreign central banks:

Bank of Canada
Bank of England
Bank of Japan
European Central Bank
Swiss National Bank

That sets the background as although we are supposedly out of crisis the measures enacted in response to the credit crunch never seem to go away. Another powerful point was the way that if you read between the lines the existence of a Powell Put Option for equity markets is confirmed.

Early in the new year, market sentiment improved following communications by Federal Reserve officials emphasizing that the Committee could be “patient” in considering further adjustments to the stance of policy and
that it would be flexible in managing the reduction of
securities holdings in the SOMA. On balance, stock
prices finished the period up almost 5 percent while corporate risk spreads narrowed….

This is in many ways more significant than the rhetoric about possible future interest-rate increases which seem set to fade away. Also whilst this does not actually say that QT or Quantitative Tightening is toast it gives us that impression.

Almost all participants thought that it would be desirable
to announce before too long a plan to stop reducing the
Federal Reserve’s asset holdings later this year.

Whilst it has it faults as a website sometimes Zerohedge is on the money.

Dear  is there a direct line for “market participants” to complain when stocks perform not as expected?

There is also the issue of the apparent way that the Federal Reserve capitulated under pressure from President Trump who only a day earlier had made his views clear yet again.

Had the opposition party (no, not the Media) won the election, the Stock Market would be down at least 10,000 points by now. We are heading up, up, up!

His favourite song must be that one by Yazz.

Monetary Developments

Sadly the Minutes ignore this issue although they do look at credit issues.

Staff continued to monitor developments in the leveraged loan market given the sharp rise in spreads and slowdown in issuance late last year. The build-up in overall nonfinancial business debt to levels close to historical highs relative to GDP was viewed as a factor that could amplify adverse shocks to the business sector.

We can do better than them on two counts firstly by looking at the narrow money data as a leading indicator and also we have the January and some February data which they did not. Doing so shows us that M0 growth is running at an annual rate of 2% over the past three months, 3.3% over the past 6 months and 2.3% over the year. As you can see it picked up for a bit but has fallen back.

If we look for perspective we see that it was over 15% in 2011 and 12 and in more recent years was between 7% and 8%. So we can expect a slowing economic effect from it as we note that some of the decline will be due to the QT programme. Looking into the detail of the narrow money numbers we see that the amount of cash in circulation is rising (6% in the year to January) and it is demand deposits (-2.5% over the past year) which have been the main factor in the rate of growth of narrow money falling,

So we move on with noting that a monetary brake for say the first half of 2019 has been applied to the economy.

Switching to broad money gives a different picture as we recall that it applies some two years or so ahead. That is because it has picked up in the last three months to an annual rate of 6% whereas over the past twelve months the annual rate of M2 growth was 4.3%. So assuming it works and the lags are variable the US economy should see either some growth or some inflation in a couple of years time. Also Americans have been saving and as an aside as I cannot recall a mention of them for some time they also have some US $1.7 billion of what they would call travellers checks.

Consumer Credit

Earlier this month we were told this.

In 2018, consumer credit increased 5 percent, with revolving and nonrevolving credit increasing 2-3/4 percent and 5-1/2 percent, respectively. Consumer credit increased at a seasonally adjusted annual rate of 6-1/2 percent in the fourth quarter and at a rate of 5 percent in December.

As you can see that is greater than economic growth but much less exposed than my own country the UK as not only is the rate of expansion lower but the rate of economic growth which was confirmed at an annualised 3.4% for the third quarter yesterday is higher.

However if we look into the detail we can note signs of trouble in the car loans sector which has grown to US $1.155 trillion. The growth rate has roughly halved in terms of annual dollar increases from the 75-80 billion it was in 2014-16 to 37 and 41 billion in the last two years respectively. We know that the industry has done its best to halt the decline with measures such as the “extend and pretend” methodology as some car loans last 8 years. So there are signs of the market signing along with Lyndsey Buckingham.

I think I’m in trouble,
I think I’m in trouble.

On that subject let me add get well soon to Lyndsey.


Whilst we do not have the numbers for the fourth quarter due to the government shut down we do have this from the Atlanta Federal Reserve.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2018 is 1.4 percent on February 21, down from 1.5 percent on February 14. After this morning’s advance durable manufacturing report from the U.S. Census Bureau, the nowcast of fourth-quarter real nonresidential equipment investment growth declined from 4.5 percent to 3.9 percent.

As you can see that would be quite a lowing from what we saw earlier in 2018 and if we switch to the New York Fed its tracker for first quarter data released so far has US GDP growing at 1.1%. Putting all this another way this brings me back to my article on the 12th of this month as I mulled how the super massive black hole of QE to infinity seemed to be sucking us all in as we approach the event horizon. For us to avoid it we will need this from the Stranglers.

Something’s happening and it’s happening right now
You’re too blind to see it
Something’s happening and it’s happening right now
Ain’t got time to wait
I said something better change
I said something better change
I said something better change
I said something better change