Wednesday, June 29, 2022

Two long leading indicators - real money supply and credit conditions - worsen


 - by New Deal democrat

M1 and M2 money supply for May was reported yesterday by the Fed. The former was unchanged for the month, and the latter was up a tiny 0.1%:

That is significant. Why? Because real money supply is a long leading indicator. Real M2 fell out of favor after failing to actually decline YoY prior to the 2001 and 2008 recessions, but a YoY% decline in real M1 and a real YoY% gain of M2 of less than 2.5% is nevertheless an excellent leading indicator for recession:

Here is a close-up on the past year:

Both real M1 and real M2 are outright negative as of May.

There have been several false positives for this indicator: 1967, 1987, and 1994. But otherwise, every time this has happened, a recession has followed within 9 months to 2 years.

Additionally, the Chicago Fed updated its financial conditions indexes this morning. The Adjusted National Conditions Index rose to +.15, and the Leverage Index rose to +.53. With the exceptions of 1987 and 2011, both of these are at levels typically associated with oncoming recessions:

In sum, the long leading indicators continue to worsen. The only unambiguously positive such indicator at the moment is the Treasury yield curve (and even there, the 10 year minus 2 year spread is *almost* - but not quite - inverted).