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By New_Deal_democrat April 11, 2018 11:08 am
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Further slow deterioration in real money supply, mortgage applications
Let me start by emphasizing that neither of the two indicators I am chiefly discussing in this post have actually turned negative on any sustained basis.  But if there has been a theme in my posts in the last 6 to 12 months, it has been the slow decline of the overall positive readings among that data which forecasts the economy more than a year ahead.

One of those sources is money supply. Real M2 has been deteriorating sharply and has gone all the way from positive to negative in the last 12 months. Recently M1 has also shown signs of deterioration.

One of the things I like to do is to set down an objective marker in advance, to minimize my own biases in determining whether something is positive or negative.  In that vein I have recently written that "Should real M1 YoY growth fall below 3.5% and turn negative on a 6 month basis, I will downgrade it to neutral."

With today's report on March inflation, let's update real money supply.  What we find is that there have been several weeks in the last couple of months where one but not both of the two markers
have been met.

In the month of February, real M1 did turn slightly negative on a 6 month basis:

but on a monthly basis, YoY growth has gone no lower than March's 4.5%:

In several weeks (February 15 and March 15), YoY growth has been as low as 3.6% (not shown), but that is still a weak positive.

M1 improved in March, and with the -0.1% m/m inflation reading, M1 is back into positive territory on a 6 month basis now:

In passing let's note that meanwhile, real M2 continues to worsen:

A similar dynamic is in play with purchase mortgage applications. Here's what they look like courtesy of Bill McBride a/k/a Calculated Risk:

Unfortunately there is no source that allows me to produce a graph for you of the YoY change. But I have been keeping track of this since I noticed the slowdown at the beginning of this year.

On a weekly basis, purchase mortgage applications data is very noisy. For example, in the first week of January they were -1% YoY. Four weeks later they were +10% YoY. This morning they were reported at -0.5% YoY. In order to make more sense of the trend, we need to average over a number of weeks.

To wit, the average YoY change in mortgage applications from a sample of each of the first weeks of the last six months of 2017 was +7%. From the latter half of December until the end of February of this year, the average YoY change was about +4.5%. In the seven weeks since the beginning of March, the YoY change is down to +3%.

My preset marker for mortgage applications turning neutral is anything under +3%, so while they are negative this week, the trend remains just slightly into positive territory.

At some point some day the long leading indicators are going to have deteriorated enough for me to go on long term recession watch.  By no means are we there yet. But we are inching closer.

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