M2 flow on the decline

The U.S. consumer remains the primary underpinning of an economy that remains remarkably resilient in the face of significant Fed tightening over the last 12 months. As long as the job market remains robust, the economy may continue to surprise to the upside.

But we know we must be vigilant as we look for early signs of economic changes. In recent charts, we have highlighted an increase in weekly jobless claims, although they were stable this week. The number of open jobs also has dropped, and there has been somewhat slower job growth within the monthly unemployment report from the Department of Labor.

Market-based signals like the inverted yield curve have also historically pointed to risks of slowing economic growth. Additionally, the recently covered Senior Loan Officer Opinion Survey (SLOOS) indicated an ongoing tightening of credit conditions.

This week’s chart looks at another potential sign of slower growth, negative growth in the M2 measure of money within our economy. Our data set from the Federal Reserve only goes back to 1960, but we can see this is the first time since then that M2 growth has gone negative on a year-over-year basis. In fact, some longer data sets indicate this is the first time M2 growth has been negative on a year-over-year basis since the Great Depression. Generally, economic data that has not been seen since the Great Depression is deemed to be pretty bad.

The offset to this potential weakness is also shown on the chart as we can see the growth of M2, as a result of pandemic-related monetary and fiscal stimulus, at an unprecedented rate. Overall the “stock” or amount of money in the economy is still much higher than it was pre-pandemic, but the recent rate of change means the “flow” of money is declining. The gray bars representing past recessions show some level of correlation between expanding and slowing M2 growth. Still, the lack of data from the growth rate and now the absolute decline in M2 means its impact on the economy going forward is hard to quantify. Like so much around the pandemic, it is going to take some time, but this data set bears watching.

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