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US financial accounts confirming narrow money weakness

Posted on Monday, September 23, 2019 at 03:56PM by Registered CommenterSimon Ward | CommentsPost a Comment

The Federal Reserve last week released its Q2 financial accounts, containing detailed information on sectoral financial activity. Key takeaways include: 1) the “best” narrow money measure is giving a negative signal for near-term economic prospects, 2) corporate equity-buying has normalised after the boom due to foreign profits repatriation and 3) debt levels of non-financial businesses and households converged in Q1 and remained equal in Q2 – business debt was consistently lower over 1992-2018.

The sectoral data in the financial accounts permit calculation of non-financial M1, the preferred narrow money aggregate here. This comprises M1 holdings of households and non-financial businesses – headline monthly M1 includes foreign and financial sector holdings, which are less relevant for assessing prospects for spending on goods and services.

Swings in two-quarter real (i.e. deflated by the CPI) non-financial M1 momentum lead swings in two-quarter GDP momentum – see first chart. Real money momentum fell sharply between Q4 2018 and Q2 2019, suggesting a GDP slowdown into Q4 2019 or Q1 2020.

Net equity purchases by non-financial corporations boomed in 2018 and early 2019 as tax changes encouraged a one-off repatriation of foreign retained earnings and company managers prioritised share buy-backs over business expansion and / or reducing debt. The reflux of foreign profits, however, ended in H1 and equity-buying fell sharply in Q2 – second chart.

Sustained strength in equity purchases, even before the 2018-19 boom, has been a key driver of a rise in non-financial business debt since 2012. Business debt converged with household debt in Q1 and both grew at a similar rate to nominal GDP in Q2 – third chart.

A stabilisation of equity purchases, even at the lower Q2 level, would imply a further rise in business debt. Low mortgage rates, however, are stimulating household credit demand and could lead to a recovery in the debt to GDP ratio. A cross-over of the two ratios – the business ratio was last higher in 1991 – could, therefore, be deferred.

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