Last month, we reported that money-supply growth accelerated for the first time after a year-long period of falling growth rates, at the end of which money-supply growth fell to a near-ten-year low of 2.6 percent, year over year.
In March of this year growth rates had headed upward, rising to a year-over-year growth rate of 5.1 percent.
In April, however, growth rates lessened again, coming in at a rate of 4.3 percent, year over year.
(The money-supply metric used here — an "Austrian 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.)
Meanwhile, the more commonly used measure of money supply, M2, continued to experience falling growth rates through the first part of this year. In April, M2 increased 3.7 percent, year over year, making it the smallest increase in M2 since 2011.
Part of what has pushed the Austrian measure of money supply above growth rates from last year was an increase in treasury deposits at the Fed.
The inclusion of deposits at the Fed is a key difference between M2 and the Austrian measure of the money supply, and growth in these deposits has added to the differences seen in growth between M2 and the Austrian measure.
In April, treasury deposits at the Fed hit a 16-month high, rising to $324 billion. The highest level for treasury deposits ever reported occurred in November of 2016, at a total of $394 billion.
What does the trend in money supply indicate?
Historically, a sizable drop in money supply growth rates suggests that a recession is on the horizon — but not on the immediate horizon.
In this graph, provided by RealForecasts.com, we see how dips in the money supply growth rate often precede recessions, but with a lag period of a year or so. In many cases, money supply growth is trending upward again by the time the recession officially begins.
Moreover, if we look at TMS totals (in terms of dollar amounts) we can see that flattening in the money supply has occurred to varying degrees on three occassions over the past 20 years. There was a slight flattening leading up to the 2001 recession, and then another in the lead up to the 2008 financial crisis. And we are experiencing some flattening now — although to a lesser extent. It's unknown if this trend will continue or if growth will pick up again.
So does the recent downturn and subsequent uptick indicate a recession?
It's difficult to say how long the current boom period will last. Home prices continue to sail upward for now, although we do see volatility in the stock market. Unemployment data doesn't point to anything catastrophic at this time.
Some indicators suggest problems, however. Delinquencies in auto-loan debt continue to trend upward, household formation is stagnating, and growth in commercial loans — a factor in expanding the money supply — remains near multi-year lows: