A pull-back in US narrow money momentum casts doubt on post-election economic optimism.

Six-month growth of M1A (comprising currency in circulation and demand deposits) eased to 5.7% annualised in October, down from an August peak of 10.0% – see chart 1.

Chart 1

Growth of the broad M2+ measure, by contrast, rose to 5.1% annualised, the fastest since March 2022. (M2+ adds large time deposits at commercial banks and institutional money funds to the official M2 measure.) Narrow money, however, has a better record of signalling turning points in economic momentum.

Six-month expansion of official M1 is weaker, at 2.9%. M1 is no longer a narrow money measure, following its redefinition in 2020 to include savings accounts.

A post in September expressed doubt that a pick-up in M1A growth would be sustained, partly because it had occurred before any rate cuts. In addition, the rise had been driven solely by the demand deposit component, with currency momentum unusually weak.

Six-month growth of currency has recovered but was still only 1.7% annualised in October – chart 1.

A further consideration, noted in a post last month, is that narrow money growth has tended to rise ahead of presidential elections but reverse shortly before or after the poll date – chart 2. (1984 and 2000 were notable exceptions.)

Chart 2

The pull-back to date has been modest but could become more serious, especially if the Fed delays further rate cuts.

Broad money growth, however, could be supported by increased monetary financing of the fiscal deficit, based on Treasury plans for higher bill issuance in Q4 and Q1 (given that these are mostly purchased by money funds and banks).

Narrow / broad money divergences can reflect shifts in confidence and spending intentions affecting broad money velocity. (Such shifts are associated with movements between low-velocity broad money components and high-velocity narrow money.) Relative narrow money strength into the summer was a positive signal for the economy; the reversal suggests fading prospects.