A large rise in US narrow money in the first week of February was only partially reversed the following week. The recent pick-up, if confirmed, suggests improving economic prospects for the second half of 2014.
Bad weather has exaggerated weakness in recent economic data but a slowdown had been expected here, partly reflecting softer monetary trends during the first half of 2013. Six-month growth of real narrow money* fell from 7.4% (not annualised) in December 2012 to 2.7% in June 2013.
Real money expansion, however, stabilised after mid-2013 and picked up to 4.7% in January. Data for the first two weeks of February imply a further increase to 5.5% or more. Underlying economic growth may remain soft through mid-2014 but second-half prospects appear to be brightening.
The chart incorporates a US February estimate along with January and December numbers for Japan and the Eurozone / UK respectively**. US real money expansion fell back into the middle of the pack in 2013 but is now diverging positively again, suggesting economic and equity market outperformance.
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, seem to be firming despite QE “tapering”, supporting the view here that QE changes have weak economic effects except under conditions of extreme financial stress.
*Currency plus demand deposits divided by consumer prices.
**January data for the Eurozone and UK are released on 27 February and 3 March respectively.
