Money is the fuel that powers the machine that is our economy. 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 but how fast that supply of money is changing.

There is 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 currently equal to 96% 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 Composite Index of Leading Economic Indicators [LEI].

M2 is the sum of all the currency in circulation, plus the total of everybody's checking accounts and savings accounts, plus time deposits 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.

What has M2 been doing lately? And, what is it telling us about the future course of the economy? From the end of February through the end of August last year, M2 was in a strong upward trend, rising at an annualized rate of 6.49%. During September, October, and about half of November, M2 flattened out and the rate of growth was essentially zero. From November 13 to the present, M2 took off to the upside once again. During that period the annualized rate of growth has been 8.82%. So, M2 is one of the few indicators that are currently giving a positive reading on the economic outlook for the coming months.

But, keep in mind that M2 is only one of eleven indicators that make up the LEI. Last week, when the Conference Board released its report on the LEI for November, four indicators were down, three indicators were up, one was unchanged, and the remaining three were not available because of the government shutdown. The contributions of the down indicators outweighed the contibutions by the up indicators so, on balance, the LEI for November was down. M2 was one of the three indicators that made a positive contribution during November. Based on currently available data, M2 will contribute positively again in December. And, if the present strong trend continues, M2 will also be up in January.

Byline: Lafferty (MF Merlin)