US narrow money trends may be starting to recover but earlier weakness suggests slower economic growth through late 2017. The latest US earnings revisions data are consistent with an imminent peak in the widely-watched ISM manufacturing new orders index. Chinese earnings revisions, by contrast, have strengthened.

The six-month rate of change of US real (i.e. consumer price-adjusted) narrow money peaked in April 2016 and fell sharply from August, turning slightly negative in February. As previously discussed, momentum changes in real narrow money have consistently led those in GDP in recent years, with the relationship suggesting that two-quarter GDP growth peaked in the fourth quarter of 2016 and will fall through the third quarter of 2017 – first chart.


Real narrow money growth, however, may be recovering in March – the last data point in the first chart is a March estimate based on the latest weekly nominal number (for the week to 13 March) and an assumed 0.2% monthly increase in the CPI. The recovery probably partly reflects income tax refunds catching up with the normal schedule after a delay due to legal changes: refunds fell by $25 billion year-on-year in February but the daily average so far in March (i.e. to 22 March) is up by 25% from March 2016, suggesting a full-month gain of $21 billion.

In addition, the Treasury has run down its cash balance to maximise its borrowing headroom ahead of difficult negotiations with Congress over raising the federal debt ceiling. The Treasury’s general account balance at the Fed has fallen from $391 billion in late January to $71 billion in the latest week. Funding the deficit by running down cash boosts bank reserves and money measures, ceteris paribus.

The forecast of softer economic momentum through the third quarter implies that short-term leading indicators such as the ISM manufacturing new orders index should be at or near a peak. Regional Fed manufacturing surveys released so far in March have been super-strong, generating expectations that the next ISM reading will remain buoyant. However, the US earnings revisions ratio (i.e. analyst upgrades minus downgrades as a proportion of the total number of earnings estimates, seasonally adjusted) correlates reasonably well with the ISM (correlation coefficient = 0.72 since 2005) and fell in March – second chart.


The Chinese revisions ratio, by contrast, reached its highest level since 2013, suggesting a strong National Bureau of Statistics (NBS) March manufacturing purchasing managers’ survey – third chart.