Recent US monetary trends have been mixed, with the broader M2 measure slowing sharply but M1 continuing to grow strongly. The economy should recover solidly during the second half but momentum could falter in early 2010 unless M2 revives.

M1 comprises currency and checkable deposits, while M2 adds small time deposits, savings accounts and retail money funds. M2 has risen at a 2% annualised rate over the last six months versus 12% for M1. The M2 slowdown is partly pay-back for a surge in growth in late 2008 and early this year – see first chart.

M2 was weak earlier last year, contracting in inflation-adjusted terms in the six months to August, just before the financial crisis snowballed. The impact on the economy was compounded by a fall in the velocity of circulation, as households and firms hoarded cash in response to rising perceived risks.

One sign that velocity might be declining was that narrow money M1 was even weaker than M2. M1 is a better measure of transactions money while M2 contains a large savings element and is likely to be boosted disproportionately by an increase in precautionary balances.

Fast-forwarding to the present, the recent M2 slowdown is less worrying because it follows a period of unusual strength and has been accompanied by continued rapid growth in M1, suggesting that velocity is recovering as financial markets normalise and economic uncertainty abates.

M2 weakness will warrant greater concern the longer it persists. Slower destocking and some revival in housing market activity may support credit and money trends later in the year. The Federal Reserve's securities purchase programme is scheduled to continue until the end of 2009, though its effects have recently been offset by other factors.

The mixed message from recent monetary data is echoed by the Fed's latest senior loan officer survey. The net percentage of banks tightening credit standards on commercial and industrial loans fell further between April and July but is still far above a level consistent with sustained economic expansion – second chart.