DO FALLING PAYROLL EMPLOYMENT ESTIMATES, DECREASING RETAIL SALES, AND RAPIDLY GROWING MONEY SUPPLY LEVELS IN THE UNITED STATES INDICATE THAT U.S. M1 VELOCITY FELL IN THE FOURTH QUARTER OF 2020?

 

Near the beginning of the year 2021, considering what has been happening to the velocity of money in the United States, particularly the U.S. M1 money supply, may help to guide macroeconomic stabilization policy.  The velocity of M1 has been falling most quarters starting with the first quarter of 2008, the first quarter of falling real output in the Great Recession.  Based on the algebraic definition of money velocity, nominal GDP spending has not increased by as much percentagewise as the M1 money supply has most quarters after the fourth quarter of 2007, thus producing decreasing money velocity.

What factors may determine whether M1 velocity in the U.S. fell in the fourth quarter of 2020?  Last week, the U.S. Bureau of Labor Statistics announced that U.S. payroll employment (nonfarm) decreased in December 2020 by roughly 140,000 jobs.  This was likely the first decrease in months.  (Readers may want to note that using the household survey data instead, U.S. employment actually posted a relatively modest increase of around 21,000 rather than a decrease as was found with the aforementioned establishment survey payroll employment estimates.)

Additionally, the U.S. Census Bureau estimated that retail sales in the U.S. decreased in October and November 2020, according to the most recent estimates available.  I noted these decreases in U.S. retail sales in my last blog entry for the year 2020.

Further, the U.S. M1 money supply has been growing at a relatively rapid rate.  Using data from the FRED website of the Saint Louis Federal Reserve Bank, I calculate a very rough estimate that the quarterly average U.S. M1 money supply may have increased by more than twelve per cent between the third quarter of 2020 and the fourth quarter of 2020.  With compounding, this would amount to growth in the nominal M1 money supply on an annualized basis of more than fifty per cent!  As of this writing, all of the data needed to calculate the quarterly average of the U.S. M1 money supply for the fourth quarter of 2020 may not yet be available, clearly making my calculation a very rough estimate.  Further, my understanding is that the calculation for 2020q4 velocity will use a weighted average of the money supply in the fourth quarter of 2020, and I did not attempt this in my rough approximation.

Given that when the estimates for the full month of December 2020 become available they will likely also show relatively rapid growth in U.S. M1 velocity, U.S. nominal GDP spending will need to have increased by a percentage at least as large to avoid a decrease in U.S. M1 velocity in the fourth quarter of last year.  With some economic data pointing to possible economic weakness in the fourth quarter of 2020, such a large increase in nominal GDP spending seems very unlikely.

Time will tell if U.S. real GDP decreased again in the fourth quarter of 2020 after a rapid rise in the third quarter.  Those two quarters were preceded by consecutive quarters of falling real GDP in the first and second quarters of 2020, with an especially sharp drop in the second quarter.

What should be done to try to accelerate economic growth, given that U.S. real GDP in the third quarter of 2020 was still below where it was in the fourth quarter of 2019 and the first quarter of 2020?  For a start, the decrease in money velocity suggests that additional expansionary fiscal policies, for example, $2,000 stimulus checks to those who could use the funds; could help to ensure that dollars trade more frequently in GDP transactions.  Government purchases could be particularly helpful in that regard.  Maintaining money velocity levels closer to pre-Great Recession levels is something that has been missing in the Great Recession, the Not-So-Great Recovery, and the COVID-19 coronavirus collapse.  Strategic expansionary fiscal policy can help.

 

(The following were used in writing the above blog entry.  Data revisions, some of which may occur soon, could alter the analysis above.)

 

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

https://fred.stlouisfed.org/data/M1.txt

https://fred.stlouisfed.org/data/M1SL.txt

https://fred.stlouisfed.org/data/GDPC1.txt

https://harrisonhartman.blogspot.com/2020/12/decisions-decisions-important-us-fiscal.html