M1 VELOCITY DOWN AGAIN ACCORDING TO INITIAL ESTIMATES (Originally from 2016)

(I think that the blog post below is from January 30, 2016.)

Yesterday (Friday, January 29), the web page of the Saint Louis Federal Reserve Bank posted the initial estimate of the velocity of the M1 money supply in the U.S. for the fourth quarter of 2015, presumably based on Federal Reserve data for M1 and data from the Bureau of Economic Analysis for nominal GDP. Based on my calculations, this initial estimate showed another decrease in M1 velocity, implying that on a seasonally-adjusted, annualized basis, the dollars that are part of the U.S. M1 money supply traded in GDP transactions fewer times on average in the fourth quarter of 2015 than the number of times on average that they traded in the third quarter of 2015. Readers should recall that GDP estimates and money supply estimates can be and likely will be revised, so it is possible (though perhaps not likely) that in the future, U.S. M1 velocity data could show an increase between the third and fourth quarters of 2015 rather than a decrease (or no change).

 

What led to the fourth quarter decrease in M1 velocity, at least from an arithmetic perspective? The growth rate of the M1 money supply slowed down, but so did the growth rate of nominal GDP and its component parts, real GDP and the implicit deflator. The initial estimate of nominal GDP spending for the fourth quarter increased at an annualized, seasonally adjusted rate of only about 1.5 per cent based on my calculations using data from the Saint Louis Federal Reserve web page. The initial estimate of real GDP growth from the third quarter of 2015 to the fourth quarter of 2015 was only about 0.7 per cent, as reported by CNBC and probably others. The Saint Louis Federal Reserve web page shows that the seasonally-adjusted deflator increased only about 0.8 per cent last quarter on an annualized basis. The M1 money supply on a seasonally adjusted, annualized basis must have grown more rapidly than nominal GDP spending in the fourth quarter of 2015, at least in terms of the initial estimates, in order for M1 velocity to continue to have fallen. Using data from the Saint Louis Federal Reserve web page, I calculated that the quarterly average of seasonally adjusted data for M1 in the U.S. did grow faster than nominal GDP spending in the fourth quarter of 2016, with the approximate growth rate of M1 at nearly 3.3 per cent.

The velocity of the U.S. M1 money supply has decreased nearly every quarter after the fourth quarter of 2007. What will happen to the velocity of M1 in the United States and in other countries in the year 2016 and beyond?