Money Supply Growth Dropped In May To A 15-Month Low

Similar to the TMS measure, the M2 growth rate slowed in Spring 2021, dropping to 14.1 percent during May 2021, down from 18.3 percent during April 2021, and down from May 2020's rate of 21.8 percent. M2 growth peaked at a new high of 27.0 percent during February 2021 before declining in March, April, and May.  

Money supply growth can often be a helpful measure of economic activity, and an indicator of coming recessions. During periods of economic boom, money supply tends to grow quickly as commercial banks make more loans. Recessions, on the other hand, tend to be preceded by periods of slowing rates of money supply growth. However, money supply growth tends to grow out of its low-growth trough well before the onset of recession. As recession nears, the TMS growth rate typically climbs and becomes larger than the M2 growth rate. This occurred in the early months of the 2002 and the 2009 crises. A similar pattern appeared before the 2020 recession, suggesting the US was headed for a recession even before the covid shutdowns. 

The recession did become a reality in the Spring of 2020 with the second, third, and fourth quarters of 2020 all showing negative growth in real GDP. Real GDP was down 9 percent, year over year, during the second quarter, and still down 1.8 percent for the fourth quarter of 2020. Although year-over-year GDP growth was positive during the first quarter of 2021 (at 0.5 percent) this represents very weak growth given the enormous amounts of monetary and fiscal stimulus that have poured into the larger economy. Considering the Fed's reluctance to scale back stimulus plans, it appears there is little confidence that the economy would stay in positive territory without ongoing stimulus. At Last month's FOMC meeting, Fed officials announced there would be no increases in the target interest rate until 2023, at the earliest. 

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