- by New Deal democrat
In the past week, I have been updating my suite of long leading indicators. First I looked at “real” consumer-focused indicators. Then I looked at housing, an important interface between consumers and producers, as well as corporate profits. Next I updated interest rate indicators. I this final installment I will look at money and credit indicators.
Let’s start with money, in the form of real M1 and M2. Money supply indicators were all the rage late in the last century, in the wake of Milton Friedman’s influence. Subsequently they have fallen out of favor, but they are still useful, as we will see below.
In the immediate wake of COVID, the Fed flooded the economy with money, quadrupling M1 and increasing M2 by about 15% during and immediately after the COVID lockdowns. In real terms money supply peaked in Q1 2022 (set to 100 in the graph below). Subsequently the Fed withdrew money from the economy, with real money supply making its post-pandemic low in April 2024:
Since then both real M1 and M2 have risen about 3%. This is a positive signal.
But the best way of looking at money supply for forecasting purposes is YoY. As the historical graph below shows, no recession has ever started with a positive YoY real M1, or a YoY real M2 growing by more than 2.5%:
Before the pandemic, when both of those conditions had been met simultaneously, with the exception of 1966 and briefly in 2005, a recession has always followed, usually about 1 year later.
Here is the post-pandemic close-up:
Both real M1 and M2 turned very negative in late 2022 through 2023, a false positive signal. Since then both have turned positive, with real M1 being up 2.3% YoY as of February, and real M2 up 2.4%. Both measures are also accelerating, something that is typically seen early in recoveries in the wake of recessions.
In short, real money supply is a substantial positive at present.
Now let’s turn to credit, as measured by the quarterly Senior Loan Officer Survey, which was most recently updated in February for Q4 o last year. There are two metrics in that survey which have been reported since 1990, and so have long enough historical records to be valuable: the percentage of banks tightening vs. loosening credit standards, and demand for credit.
First, here is the change in lending standards, with net tightening being the positive value:
The 1990s and 2000s expansions followed a classic pattern, with standards being loosened in the early phase and tightened in the later phase. The very long 2010s expansions appeared to be following a similar pattern, until it was nuked by COVID. In the past-pandemic period, standards initially became “less tight” but never have actually become “loose.” Rather, for the past two years they have remained slightly tight. This is a somewhat negative indicator, especially considering that there was a similar such “slightly tight” episode in 1999 and early 2000, before standards tightened sharply.
Demand for credit is broken down both by large banks (dark red and blue, thick lines) and smaller banks (light red and blue, thin lines), and also by whether the demand is from large firms or smaller firms. Here is the entire historical view:
All of the last three recessions have only occurred after all segments of demand for credit went into decline. Whether there would have been a recession in 2020 in the absence of the pandemic and its lockdowns is one of those things we will never know.
In any event, the only segment negative in the last report, and only slightly, is demand from smaller firms from smaller banks. On the other hand, demand by large firms from large banks is at one of the highest levels ever (I strongly suspect this is related to the construction of AI data centers).
In any event, the demand segment of the Senior Loan Officer Survey is nowhere near suggesting a recession is close.
This completes my updating of the long leading indicators. So let me sum up:
1. Real retail spending and real spending on goods per capita are neutral, very close to turning negative but not (yet) having done so.
2. Housing is recessionary - and has been for many months.
3. Corporate profits are very positive.
4. Interest rate levels, particularly for corporate bonds, are neutral.
5. The yield curve is positive, but with the imporant asterisk that the manner of its regularizing has been unique.
6. Real M1 is positive and real M2 on the cusp of giving a positive signal.
7. Credit standards are slightly tight, and so a slight negative.
8. Demand for credit is almost uniformly positive.
Note that only 1 metric - housing - is absolutely negative, with another - credit standards - only slightly so. Two producer side metrics - profits and demand for credit - are very positive. The rest are generally neutral or mixed, or in the case of the yield curve, positive but with a very important caveat.
Of the metrics that are only reported quarterly, corporate profits won’t be reported for Q1 until the end of May, although proprietors’ income will be updated later this week. The Fed has not yet indicated when the Senior Loan Officer Survey will next be updated, although it is likely to be sometime in May.
