Money is the lifeblood of the economy. You can't buy and sell stuff without money. That's why everybody from you and I on up to the Secretary of the Treasury, the Chairman of the Federal Reserve Board, and the President are interested in not only how much money is available for spending [the money supply] but how fast that supply of money is changing.

The Federal Reserve has established three different money supply classifications. These are known as M1, M2, and M3. M1, in essence, is the sum of all the currency in circulation plus the total of everybody's checking accounts. M2 is equal to M1 plus savings accounts, time deposits [CD's, for example] under $100,000, money market fund shares and a couple other semi-arcane financial instruments called overnight Eurodollars and overnight repurchase agreements between commercial banks. M3 consists of everything making up M2 plus time deposits of more than $100,000 and something called term repurchase agreements.

Now, it only makes sense that there should be a strong relationship between the amount of money folks have and the amount of money that winds up getting spent. This is certainly the case in the United States where personal consumption expenditures are equal to 92% of disposable personal income. So strong is this relationship between money supply and future economic activity that the Commerce Department has selected the M2 measure of money supply as one of the 11 indicators that make up its index of leading economic indicators [LEI].

What has M2 been doing lately? And, what is it telling us about the future course of economic activity? From the end of February through the end of September of this year, M2 has been in a strong upward trend, rising at an annualized rate of 6.49%. This compares with a growth rate of only1.05% for the year preceding February. And the pace does not seem to be diminishing. During the 10 week period ending October 9, the annualized rate of increase was 8.40%. M2 is in a strong upward trend and not showing any signs of topping out. So, this leading indicator is currently giving a positive reading on the economic outlook for the coming months.

Byline: Lafferty (MF Merlin)