US narrow money rose strongly during the first half of 2014 but slowed in July and probably contracted last month, judging from weekly data through 25 August. Barring a strong September rebound, this suggests that the economy will lose momentum in early 2015.

Changes in real narrow money expansion precede economic growth fluctuations by about six months, according to the monetarist forecasting rule followed here. This relationship is strongest empirically in global data but is also informative at the country level.

Six-month growth of US real narrow money rose significantly between November 2013 and June 2014, suggesting strong economic performance during the second half – see previous post. Six-month industrial output expansion reached a 46-month high in July and July / August business surveys have been buoyant, with the new orders components of the ISM manufacturing and non-manufacturing surveys achieving their best levels since 2004 and 2005 respectively.

Monetary strength, however, reversed abruptly last month. Narrow money is likely to have contracted by about 0.75% in nominal terms, with six-month real growth falling to its lowest since November – see chart.

Monthly money supply changes are volatile and the August fall could be reversed in September. A bumper increase, however, would be required to push six-month real narrow money growth back up to its mid-year level.

Narrow money is held mainly for transactions purposes and changes usually occur ahead of spending variations, explaining its leading properties. US spending plans, in other words, may be turning more cautious, perhaps because of approaching Federal Reserve policy tightening.

Slower US real narrow money expansion suggests that the global measure tracked here will moderate further in August – see Wednesday’s post.