Money supply growth fell to a three-month low in May this year, continuing a general downward slide in growth rates that’s been in place since late 2016.
In May, year-over-year growth in the money supply fell to a 3-month low, growing 4.2 percent. That was down from April 2018’s rate of 4.3 percent, but remains up from November 2017’s low of 2.6 percent:
The money-supply metric used here — an Austrian or “true” money supply measure — is the metric developed by Murray Rothbard and Joseph Salerno, and is designed to provide a better measure than M2. The Mises Institute now offers regular updates on this metric and its growth.
The “Austrian” measure of the money supply differs from M2 in that it includes treasury deposits at the Fed (and excludes short time deposits, traveler’s checks, and retail money funds).
M2 growth accelerated in May 2018, rising to 3.8 percent, compared to April’s rate of 3.7 percent. Overall, though, the M2 growth rates has fallen considerably since late 2016.
Money supply growth can often be a helpful measure of economic activity. During periods of economic boom, money supply tends to grow quickly as banks make more loans. Recessions, on the other hand, tend to be preceded by periods of falling money-supply growth.
Factors at work in differences between M2 and the Rothbard-Salerno measure include treasury deposits at the Fed , which have climbed again in recent months back to near all-time highs. Rothbard-Salerno calculates money supply including these deposits as money, although M2 does not. Thus, these recent increases in treasury deposits will result — all else being equal — in more money-supply growth in the Austrian measure of the money supply, than in M2.
The Rothbard-Salerno method also removes retail money funds and small time deposits from the money supply. In recent months, both retail money funds and small time deposits have been increasing. So these increases, which show up in M2, are not reflected in the Austrian measure.
The overall result has been slightly more moderation in the Austrian measure of money supply over the past 18 months, than we see in the M2 measure. We can see that in the orange line here showing the total money supply in billions of dollars:
What should we take away from this? Falling growth rates — not necessarily into negative territory — often precede economic crises. It nevertheless remains impossible to say with any precision as to how long after a sizable drop in money-supply growth a recession is likely.
2017’s declines in money supply, however, were the largest we’ve seen since 2007, and do point toward a worsening in economic activity.
We can see this partly, for example, in falling loan activity, since loan activity is a major factor in money creation: