U.S. M1 VELOCITY PROBABLY FELL AGAIN IN THE THIRD QUARTER OF 2016 (Originally from 2016)

(I think that the blog post below is from October 20, 2016.)



Based on Federal Reserve data from www.economagic.com, I calculate that the seasonally-adjusted, quarterly average U.S. M1 money supply increased between the second quarter and the third quarter of 2016 at an annualized rate (with compounding) of roughly 9.7 per cent.  (Note that estimates mentioned may be revised.)  Given that the velocity of M1 can be calculated as nominal GDP divided by the M1 money supply (or real GDP times the implicit deflator (divided by 100) divided by the M1 money supply), the relatively rapid M1 money supply growth implies that nominal GDP growth in the third quarter would need to have been even faster than the estimated (approximately) 9.7 per cent annually to have resulted in an increase in M1 velocity.

Because data at www.economagic.com (probably compiled by the Bureau of Economic Analysis) show that (1) both real GDP and the implicit deflator have only been increasing in recent quarters in 2015 and 2016 by at most a few per cent each on an annualized basis and (2) the quarter-to-quarter change in nominal GDP (NOT in absolute value terms) has been less than positive seven per cent on an annualized basis each quarter after the first quarter of 2006, it appears that when M1 velocity for the third quarter of this year is announced later this month, the estimate will probably show another decrease.  If the release of M1 velocity data shows another decrease in the third quarter, then that would make 30 quarters of falling M1 velocity out of 35 consecutive quarters starting with the first quarter of 2008.

Will there be another decrease in the fourth quarter?  If money supply growth remains relatively rapid, then that could be the key.