Is US money growth reviving?

Posted on Friday, May 5, 2017 at 10:58AM by Registered CommenterSimon Ward | CommentsPost a Comment

US GDP growth undershot consensus expectations in the fourth quarter of 2016 and first quarter of 2017, as had been signalled by real narrow money trends last summer. Real money growth may be starting to recover but recent weakness suggests that a significant rebound in economic momentum will be delayed until late 2017.

As discussed in previous posts, turning points in six-month growth of real (inflation-adjusted) narrow money growth have consistently led peaks and troughs in two-quarter GDP expansion in recent years. The labels in the first chart pair up turning points in the two series. The consensus was bullish about economic prospects last autumn but six-month real money expansion had peaked in April 2016 and was falling sharply, signalling likely disappointment. GDP momentum duly slowed markedly in the fourth and first quarters.


The consensus claims that seasonal adjustment problems and other “special” factors artificially depressed the first-quarter result. The Blue Chip consensus forecast is for quarterly annualised GDP growth to recover from 0.7% in the first quarter to 2.7% in the second. This would still leave two-quarter GDP expansion significantly lower than in the third and fourth quarters of 2016 – first chart.

Six-month real narrow money growth bottomed in February, recovering modestly in March and April – the last data point in the chart is an April estimate based on weekly data through 24 April and an assumed 0.2% monthly rise in consumer prices. The lead time between real money growth and GDP growth has averaged about six months recently, suggesting that economic momentum will start to revive at the end of the third quarter.

A further recovery in real narrow money growth is needed to “confirm” this scenario. The forecasting approach here uses monetary data to assess economic prospects but does not attempt to predict monetary trends, since there is no reliable method for doing so. Several recent developments, however, are consistent with a real money revival.

First, recent commodity price weakness is likely to result in a slowdown in six-month consumer price inflation, implying a rise in real money expansion assuming that nominal growth is stable – second chart.


Secondly, the monetary base has sometimes led narrow money in recent years and has recovered significantly so far in 2017 after contracting in late 2016 – third chart. This contraction reflected a rise in the Treasury’s balance at the Fed and greater use of the Fed’s reverse repo programme, both of which have reversed in 2017.


Thirdly, narrow money growth has been loosely correlated, inversely, with the two-year swap spread, with the spread sometimes leading – fourth chart. The spread has fallen recently, consistent with the upturn in money expansion.


A further recovery in real narrow money growth would suggest a stronger economy in late 2017. Treasury yields could move higher in anticipation of this prospect and as upward pressure on wage growth keeps the Fed on a tightening tack.

UK money trends signalling H2 economic slowdown

Posted on Thursday, May 4, 2017 at 12:43PM by Registered CommenterSimon Ward | CommentsPost a Comment

Soft UK GDP growth in the first quarter of 2017 partly reflected pay-back for a strong fourth quarter and a recovery seems likely in the current quarter. Monetary trends, however, have deteriorated significantly since the autumn, suggesting notably weaker second-half economic performance.

The preliminary estimate of a 0.3% rise in GDP in the first quarter released last week was in line with the suggestion from monthly data – see previous post. The preference here is to focus on six-month or two-quarter changes to assess trends in economic series. The weak first-quarter GDP rise followed a 0.7% fourth-quarter gain, which could be revised higher later this month, based on recent services turnover data. Growth across the two quarters, therefore, is currently estimated at 1.0%, or 1.9% at an annualised rate – faster than in the US (1.4%) and the same as in Euroland.

This solid performance was signalled by monetary trends – six-month growth of real (i.e. inflation-adjusted) narrow and broad money remained elevated through September / October 2016 and typically leads economic momentum by six to 12 months. On this basis, economic news may remain reasonably positive in the current quarter, with GDP growth recovering from the first-quarter disappointment.

Real money measures, however, slowed sharply around year-end, reflecting both lower nominal growth and faster inflation. March numbers released today were respectable in month-on-month terms but failed to reverse the deteriorating trend. The preferred narrow and broad aggregates here are non-financial M1 and non-financial M4, comprising money holdings of households and private non-financial corporations (PNFCs). Six-month growth rates of these aggregates, deflated by consumer prices (seasonally adjusted), were the weakest since 2011-12 – see first chart.


The real money measures are not yet contracting, as they did before the 2011-12 “double dip” scare. The fall in six-month growth, however, has been comparable in scale to the 2010-11 decline. GDP expansion averaged only 1.3% at an annualised rate in the two years to end-2012 – similar sluggishness may be in prospect unless monetary trends revive.

Annual growth of nominal non-financial M1 and non-financial M4 fell to 8.5% and 5.2% respectively in March, suggesting that annual nominal GDP expansion will moderate later in 2017 – second chart. Money trends are now notably weaker in the UK than Euroland, where annual growth of non-financial M1 and non-financial M3 rose further to 10.1% and 6.1% respectively in March – see previous post.


Annual growth of the Bank of England’s M4ex measure is stronger than that of the non-financial M4 aggregate tracked here, at 6.7% in March – second chart. M4ex continues to be inflated by a rapid rise in money holdings (and bank borrowing) of non-bank financial institutions, excluding intermediaries (i.e. insurance companies and pension funds, other fund managers and securities dealers). Such holdings increased by 16.4% in the year to March but have little if any implication for near-term economic prospects.

The third chart breaks out household and corporate real narrow money growth. The household component is weaker, consistent with a consumption-led economic slowdown.


The MPC is in a dilemma of its own making. Inflation is on course to rise significantly in 2017-18 in lagged response to monetary acceleration in 2015-16. The MPC should have leant against this pick-up by tightening policy in 2016 – the post-Brexit-vote easing was badly misjudged. It will be reluctant to correct this mistake against a backdrop of slowing economic momentum but inaction risks encouraging further sterling selling and entrenching higher inflation.

Euroland money numbers strong, ECB ignoring "monetary pillar"

Posted on Friday, April 28, 2017 at 11:32AM by Registered CommenterSimon Ward | CommentsPost a Comment

Euroland monetary trends continued to strengthen in March, suggesting solid economic prospects and increasing danger of a 2018-19 inflation overshoot. The ECB’s strategy seems to be to try to delay any meaningful withdrawal of monetary stimulus until after Italian parliamentary elections expected in early 2018 but policy could by then be far “behind the curve”.

Annual growth in the headline M3 broad aggregate rose to 5.3% in March, exceeding a previous high of 5.2% reached in several months in 2015-16. Narrow money M1 growth increased to 9.1%, a 10-month high. The headline measures, however, understate monetary looseness because their growth has been depressed by a fall in money holdings of financial institutions over the past 12 months, probably related to negative rates, which has no adverse implication for economic prospects. The preferred broad and narrow money aggregates here are “non-financial” M3 and M1, comprising holdings of households and non-financial corporations. Annual growth of non-financial M3 rose to 6.1% in March, the fastest since 2008, with non-financial M1 growth at 10.1%, a 17-month high. The continued acceleration of the two aggregates suggests that annual nominal GDP growth will move up towards 4% in late 2017 / 2018 – see first chart.


Prospects for economic activity depend on real (i.e. inflation-adjusted) rather than nominal monetary trends. Six-month growth rates of the non-financial money measures deflated by consumer prices (seasonally adjusted) rose strongly in March but are lower than a year ago and roughly in the middle of their ranges over the past three years – second chart. Real money trends, therefore, are consistent with a continuation of GDP growth at its recent pace of 1.5-2% per annum. Relative monetary strength, in other words, suggests that Euroland activity will be insulated from an expected loss of global economic momentum over the summer / autumn – third chart.


The country breakdown of narrow money (i.e. overnight) deposits shows strong real growth in Portugal, Spain and France, with Germany and Italy lagging – fourth chart. Lacklustre Italian economic prospects may help to explain ECB President Draghi’s determination to hold the hawks at bay until after elections. French monetary strength suggests the potential for a sharp rebound in GDP growth – officially estimated at 0.3% in the first quarter – as political uncertainty abates. A resumption of real money expansion in Greece, meanwhile, may herald improving economic prospects.


In other Euroland news today, annual “core” consumer price inflation – i.e. excluding energy, food, alcohol and tobacco – jumped from 0.7% in March to 1.2% in April, reflecting Easter timing distortions. Core inflation will probably fall back again in May but the lagged relationship with narrow money growth suggests a rising trend into 2018-19 – fifth chart.

Global growth strong but peaking

Posted on Thursday, April 27, 2017 at 02:37PM by Registered CommenterSimon Ward | CommentsPost a Comment

Monetary trends in mid to late 2016 suggested that global economic growth would surprise positively in early 2017 but momentum would peak in the spring and slow significantly over the summer (see, for example, here). Recent “soft” economic news (i.e. diffusion indices from business and consumer surveys) has been buoyant, consistent with the forecast, but some “hard” information (i.e. official quantitative data) has lagged – particularly in the US, where GDP may have grown by only 0.5% at an annualised rate in the first quarter, according to the Atlanta Fed. The expectation here is that the weakness in some hard data series will be reversed in the second quarter but that soft news is now peaking and will moderate into mid-year. Both soft and hard data are then likely to weaken through late 2017. Near-term strength in hard data may pose a risk to markets because it will reinforce a shift towards tighter monetary policies at a time when underlying economic momentum is starting to fade.

Most hard data news has, in fact, been solid, if less buoyant than survey evidence. The global industrial output measure tracked here – covering the G7 economies and seven large emerging economies (the “E7”) – is estimated to have risen at a 3.2% annualised pace in the first quarter of 2017. The US has contributed to this performance, with manufacturing output growing by 2.8% annualised, the fastest since 2014.

The long-standing forecast here has been that six-month growth of G7 plus E7 industrial output would peak in the second quarter, possibly in May, and moderate through the third quarter. This reflects a fall in six-month real narrow money growth from a peak in August 2016 – real money growth turning points have led those in output growth by an average of nine months historically. Real money growth reached a low in December 2016 and appears to have rebounded sharply in March, based on partial data – see first chart. This profile, however, partly reflects India’s demonetisation programme, implemented in early November, which resulted in an immediate plunge in narrow money M1 followed by a V-shaped recovery. The third line in the first chart shows an adjusted real money growth series that attempts to iron out this volatility by holding Indian narrow money stable at its October level. This measure reached a low in February, with an estimated small recovery in March. Both the unadjusted and adjusted measures remain significantly below the August 2016 peak. Monetary trends, therefore, continue to signal a weaker economic outlook, with industrial output growth likely to slow through late 2017 (based on the February trough in the adjusted measure).


Confidence here in an imminent reversal of economic momentum has been reinforced by recent OECD leading indicator data (published for February and estimated for March). Six-month growth of a composite G7 plus E7 indicator derived from the OECD country data appears to have peaked in January, with one-month growth falling for a fourth consecutive month in March – second chart. Leading indicator growth turning points have led those in industrial output growth by four to five months on average historically, so this aligns with the monetary forecast that six-month output expansion will top out around May.


The next stage of the scenario should be a fading of business survey strength. The third chart shows a composite G7 plus E7 survey indicator that combines diffusion indices for new orders or output expectations, mostly for the industrial sector. This measure is closely correlated with the widely-monitored Markit global manufacturing purchasing managers’ index (for which a hefty subscription is required for data access) and – like the PMI – has been a coincident to very short leading indicator historically (albeit benefiting from a short publication lag). The indicator may have peaked out in February / March, consistent with a May peak in six-month output expansion.


A softening of business surveys would be expected to be accompanied by a less favourable balance of revisions of company earnings forecasts by equity analysts. The G7 plus E7 business survey indicator correlates closely with the MSCI All Country World Index (ACWI) earnings revisions ratio (seasonally adjusted), which has moderated from a February peak – fourth chart.


The recovery in global six-month real narrow money growth in March suggests that the coming slowdown in economic momentum will bottom out in late 2017 but more evidence is required before adopting this as a central scenario.

The above forecast contrasts with the mood of optimism at the IMF spring meeting of the global policy-making elite and the opinion of the FT’s chief economics commentator, who states that “[t]he world economy is improving” and “[t]here is now a reasonable chance of a cyclical recovery”. The Keynesian consensus, of course, was pessimistic nine months ago as the economy was gaining momentum in line with earlier monetary strength.

UK data suggesting significant Q1 GDP slowdown

Posted on Friday, April 21, 2017 at 10:56AM by Registered CommenterSimon Ward | CommentsPost a Comment

The preliminary first-quarter GDP estimate to be released on Friday 28 April may show a quarterly increase of only 0.3-0.4%, while revised data to be issued in late May could upgrade the fourth-quarter rise from 0.7% to 0.8%. The 8 June general election, therefore, may take place against the background of a halving of reported quarterly growth.

A post in early March suggested that GDP would rise by 0.4-0.5% in the first quarter – below a Bank of England staff projection of 0.6% at the time of the March MPC meeting. Subsequent data have, on balance, been weaker than expected then. Services turnover, in particular, was soft in February, suggesting little if any growth in output – see chart. Retail sales volume, meanwhile, fell by 1.8% between February and March, implying a negative impact of 0.1% on monthly GDP. (The sales volume series is used to measure retail distribution output, which has a 5.6% weight in GDP.)

Fourth-quarter GDP growth is currently estimated at 0.7%, with a revision scheduled to be issued on 25 May. A recent upgrade to quarterly services turnover growth suggests that the increase in services output will be revised higher, raising the possibility that GDP growth will move up to 0.8%. (Note that official data already show non-oil GDP growth of 0.8% in the fourth quarter.)

Previous research here suggested that GDP numbers have little impact on voting intentions – the key economic drivers were found to be average earnings growth, the unemployment rate, retail price inflation, house price inflation and Bank rate. A big GDP slowdown, however, would garner media attention and could fuel some voters’ suspicions that Prime Minister May has called an early election in anticipation of Brexit-related economic weakness later in 2017 and in 2018.