IS THE VELOCITY OF U.S. M1 CONTINUING TO DECREASE? SEASONAL ADJUSTMENTS MAY BE THE KEY.

As we approach the year 2020, a year of elections in the United States including the presidential election, and as discussion will likely intensify about how much economic growth is benefiting or failing to benefit most people in the U.S., let’s consider whether the velocity of the M1 monetary aggregate in the U.S. is continuing to decrease in the fourth quarter of 2019.  Although I am not certain, my best guess is that when data are posted in late January of 2020, the data will indicate a decrease in U.S. M1 velocity in the fourth quarter of 2019.  What are some factors that led to my conclusion?

One extremely important factor is that velocity data are seasonally adjusted.  Economic activity usually (if not always) accelerates in the fourth quarter of a year due to the holiday shopping season.  Therefore, if velocity data were not seasonally adjusted, then they would likely show that money velocity, meaning the average number of times that a unit of currency traded per time period (in this case, per quarter but annualized) actually increased in the fourth quarter.  The thinking here is that with holiday shopping in the fourth quarter, people are more likely to spend U.S. dollars that they hold either as currency, coins, or as checking account deposits with no restrictions on the number of checks that can be written.  Those methods for holding ‘money’ comprise most of the U.S. M1 money stock.

However, because spending usually if not always increases in the fourth quarter, it could potentially be misleading to look at higher gross domestic product (GDP) spending in the fourth quarter of the year compared with the third quarter of the year and automatically conclude that the economy is performing much better than before, for example, in previous years.  All of the increase could be simply due to the normal increase in spending in the fourth quarter.  Thus, GDP data are usually reported on a seasonally adjusted basis so that people can make more meaningful comparisons.  The goal of the seasonal adjustment in this case is to take away the typical increase in spending in the fourth quarter to better gauge the health of the overall economy and its trajectory. 

For readers who may not be familiar, money velocity is calculated as a fraction of nominal GDP spending (or GDP measured in units of currency with time-varying buying power) divided by the measure of the money stock for which velocity is being calculated.  I am nearly certain that the nominal GDP spending used to calculate money velocity in the U.S. is seasonally adjusted.  I also think that the measure of the money stock used to calculate velocity is also seasonally adjusted.  If that is correct, then the component parts used to calculate velocity are seasonally adjusted.  Thus, although if there were not seasonal adjustments, the velocity of the M1 money supply in the U.S. may well increase in the fourth quarter of 2019 compared with the third quarter of 2019, the part of the likely increase in velocity that usually if not always occurs in the fourth quarter of a year sans seasonal adjustments is removed from the data.  In turn, seasonally adjusted U.S. M1 velocity may show a decrease in the fourth quarter of 2019.

As of this writing before the fourth quarter of 2019 has ended, I do not have access to all of the relevant U.S. M1 money stock data for the fourth quarter of 2019.  However, it appears that relatively rapid growth in the U.S. M1 monetary aggregate continued into mid-December of 2019, if not later, at least when considering seasonally adjusted data from the Saint Louis Federal Reserve Bank FRED web page accessed December 30, 2019.  In fact, my preliminary calculations show that U.S. M1 money stock growth in the fourth quarter of 2019 may wind up exceeding ten per cent on an annualized basis.  Thus, in order for U.S. M1 velocity to increase in the fourth quarter of 2019, the growth in nominal GDP spending on a seasonally adjusted, annualized basis will need to have increased by more than whatever the M1 money stock growth rate is in the fourth quarter of 2019, perhaps more than ten per cent annualized.  Presently, nominal GDP growth that high seems unlikely given that (1) I seem to recall CNBC reporting last week that a measure of holiday spending in the United States was estimated to have increased by less than four per cent compared with holiday spending in 2018, (2) seasonally adjusted, quarterly-measured (but annualized) real GDP growth has not reached a rate of five per cent since the third quarter of 2014 based on data from the Saint Louis Fed web page FRED, and (3) inflation in the U.S. has been relatively low.  If seasonally adjusted growth in nominal GDP spending fails to keep pace with the increase in the seasonally adjusted money supply in the U.S. that likely occurred in the fourth quarter of 2019, then U.S. M1 velocity will have decreased yet again.

Data from the Saint Louis Fed web page FRED can be used to show that the U.S. M1 money supply has clearly more than doubled since December 2007.  Given that U.S. money supply growth has been relatively high but reports suggest that income growth for many in the U.S. has been relatively low, who is getting the dollars newly added to the U.S. money supply?

The general decline in money velocity in the U.S. after the fourth quarter of 2007, essentially concurrent with the start of the Great Recession, calls into question the effectiveness of relying mostly on monetary policy to complete the recovery from the Great Recession and deliver relief for millions of people.  Strategic fiscal policies can help to complete the task.

(Readers should realize that subsequent data revisions could alter the analysis in this blog entry.)

THE NOVEMBER 2019 JOBS REPORT: SEASONALLY ADJUSTED VS. NOT SEASONALLY ADJUSTED DATA AND EMPLOYER VS. HOUSEHOLD DATA

Yesterday (Friday, December 6, 2019), much attention was given to the estimated increase in U.S. nonfarm payroll employment.  Of that attention, people emphasized the increase in employment based on employer surveys, often called establishment surveys, and with seasonally adjusted data.  The announced figure was a gain of 266,000 jobs, again on a seasonally adjusted basis.  Readers can find the employment news release from the U.S. Bureau of Labor Statistics (BLS) at the link below.

https://www.bls.gov/news.release/empsit.nr0.htm

This estimate clearly surpassed most if not all forecasts.  Do other estimates echo the findings of the seasonally adjusted employer survey data?

For those not familiar, economic activity often if not usually or always is greater at some points in time rather than others.  For example, U.S. retail sales would be expected to be greater in November and December of a year compared with most if not all other months due to holiday shopping.  Seasonal adjustments can be made to reported data so that people can make comparisons that in at least some cases are much more meaningful in terms of the relative performance of the economy compared with data from the previous month or the previous quarter.  To give another example, if retail sales and other economic activities usually decrease in the first quarter of the new calendar year after holiday shopping, we do not necessarily want real GDP to decrease in that quarter compared with its level from the fourth quarter of the previous year if the decrease in retail sales and other economic activity in the first quarter is at a level consistent with economic expansion (for example, over the first quarter of the previous year).  Applying a seasonal adjustment to the data can help to make better judgments about the relative health of the economy.

Further, both employers and households complete employment surveys.  Household surveys are described as being more volatile.  Nevertheless, to the extent that the household surveys are valid, they paint a different employment picture for November 2019 in the U.S. 

Returning to the employer or the establishment survey, based on my calculations, data that are not seasonally adjusted indicate that employers added about 622,000 new jobs!  That figure is much larger than the seasonally adjusted estimate.  It probably should not be a surprise that employment increases near the holiday shopping season.  The U.S. BLS establishment data not seasonally adjusted (and seasonally adjusted) are available at the link below.

https://www.bls.gov/news.release/empsit.t17.htm .

However, on a seasonally adjusted basis, Table A-1 from the U.S. Bureau of Labor Statistics available at https://www.bls.gov/news.release/empsit.t01.htm shows that from the household survey, the number of people employed increased between October 2019 and November 2019, but only by about 83,000, based on my calculations.  That figure is rather far below the seasonally adjusted estimate of a gain of 266,000 jobs reported based on the employer surveys.  Moreover, I calculate from the data in Table A-1 that the number of people employed in November 2019 based on data not seasonally adjusted actually decreased by more than 120,000!  Whether seasonally adjusted or not, do these figures from the household survey better match the ADP estimate of 67,000 private sector jobs added in the U.S. in November 2019, as noted by The Atlanta Journal-Constitution (December 5, 2019, p. A9, no author listed, “November survey:  Just 67K jobs added”) and others?  Also, does this better reflect the slight decrease in the labor force participation rate reported in Table A-1 in November 2019 regardless of whether using seasonally adjusted data or data not seasonally adjusted.  Further, the release from the U.S. BLS points out that (1) from the household survey, the number of people not in the labor force increased by more than 130,000 on a seasonally adjusted basis and by more than 350,000 on a basis not seasonally adjusted in November 2019, and (2) the average monthly job gains in 2019 have been less than in the year 2018. 

(Note that data revisions that may follow could change the calculations in this blog post, and that most if not all figures are estimates.  Also, note that clicking the web links roughly one month or more from this posting could possibly result in finding a data release for December 2019 or a month in the year 2020 or later.)

Do these findings support the hypothesis that part of the surge in jobs reported from the employer surveys is due to people working multiple jobs, as I asked in my previous blog entry available at the link below?  

https://harrisonhartman.blogspot.com/2019/12/some-questions-about-job-growth-and.html

If more than 620,000 jobs were added using data not seasonally adjusted and more than 250,000 new jobs were added after seasonal adjustments in November 2019 based on employer surveys but the change in the number of those employed based on the household surveys was either an increase of approximately 83,000 using seasonally adjusted data or a decrease of more than 120,000 using data not seasonally adjusted, then does this mean that at least some of the people accepting at least one of those newly created jobs already had a job?  And if more people are working multiple jobs, then what does that suggest about the ability of the economy to generate jobs that pay enough to earn a living?

Whether the job news from yesterday is unexpectedly bad, unexpectedly good, or consistent with expectations, will future releases continue that relationship?  Further, will the observation of Steve Liesman on CNBC yesterday that he attributed to Mark Zandi be maintained about the number of jobs created and the number of people filling jobs?  Regarding both of those questions, we’ll need to wait and see.