US monetary backdrop still expansionary
Simon Ward
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US monetary trends suggest that the economy will perform solidly over the remainder of 2011, limiting the extent of the current global slowdown focused on Asia / emerging markets and Euroland.
The first chart shows six-month changes in US industrial output and real narrow money, defined here as currency plus demand deposits. Despite recent faster inflation, six-month real money growth remains strong at more than 5% in April, or 11% annualised.
The forecasting approach here has emphasised narrow money since the financial crisis on the grounds that the demand to hold broad money has been depressed by super-low interest rates. Broader aggregates, however, are also looking better. A wide liquidity measure comprising currency, bank and thrift deposits, money market funds and commercial paper has surged over the last three months – second chart.
Monetary strength, of course, partly reflects QE2 but any slowdown after securities purchases end in June will affect the economy only from early 2012. Improving credit trends, moreover, should limit monetary weakness: recent solid expansion of commercial and industrial loan books could presage a pick-up in overall bank lending – third chart.
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