Recent data confirm a stronger US economy in early 2013. The six-month change in industrial output, for example, rose to 2.6% (not annualised) in February – a 12-month high and up from a low of -0.3% in October 2012*.

This pick-up, as usual, was foreshadowed by monetary trends. The six-month change in real narrow money rose from a low of 4.1% in March 2012 to 7.3% in October – see chart. Allowing for the usual half-year lead, this suggested that the six-month output change would bottom around September and rise into spring 2013.

Six-month real narrow money growth, however, has fallen sharply from 7.2% in December 2012 to 4.6% in February. This is solid by historical standards but a further decline is likely in March, as a 1.3% monthly rise in September drops out of the calculation. The March reading may fall below the early 2012 low of 4.1%.

Broad money is a less reliable economic predictor but six-month growth of real M2+** similarly fell from 3.1% in December 2012 to 1.8% in February – see chart.

Why is money growth slowing despite ongoing Fed largesse? Narrow money is regarded here as an indicator of spending intentions – consumers and firms are likely to shift funds into demand deposits before increasing outlays. The recent slowdown may reflect increased caution prompted by fiscal tightening and higher energy prices.

The US economy should retain solid momentum into mid-year, reflecting earlier monetary strength, but second-half risks are rising.

*October was affected by Hurricane Sandy; the second lowest reading was zero in August.

**Defined here as M2 plus large time deposits and institutional money funds.