16) Economic Indicators: Money Supply

by · October 16, 2010

What It Is

The money supply report tells you how much funds are currently floating in the market and thus ready to be used anytime by consumers, investors, or even by the government. This report is released every Thursday and covers different subsets, except for M3. It is prepared by the Federal Reserve Board.

Basic Information

The data found in the report are classified into three aggregates. The first one, M0, represents the most liquid assets. These are the ones that you can spend directly without the contacting banks or the government. These are your bills and coins on hand. The second one is called M1, which covers M0 as well as demand deposits, travelers’ checks, and checking accounts. The third one, M2, covers M1 along with time deposits of no more than one hundred thousand like CODs, savings accounts, and money market funds owned by investors. They are cash equivalents that can be spent without worrying about penalty costs. M2 makes up 30 percent of the U.S. Leading Index by the Conference Board.

The Federal Reserve, which publishes the report, has been collecting information for both M1 and M2 as early as the 1950s. At that time, there was a strong relationship between the movement of money and the growth or decline of the GDP. However, as newer technologies and methods of banking and spending were introduced, this relationship becomes less significant, to the point that certain investment portfolios are no longer included in the aggregates. These include the bonds and stocks. Today, the Federal Reserve no longer develops expectations and objectives for money supply, but continues to gather data in order to determine any possibility for inflation and determine consumer behavior, particularly in spending.

The Federal Reserve can also take part in the way the money is being supplied in the market. They can sell and buy treasuries via open market operations, develop reserve requirements, and change money supply on an everyday business. Fed funds rates can have an impact on money supply though not immediately.

Money supply changes are shown through annual percentage.

How the Report Is Valuable

Since it’s released on a weekly basis, it is a timely indicator. There will also be fewer changes as most figures will remain constant. If you know how to read the report, you can use it to make wise decisions in investing and spending your cash. Moreover, with data dating back the 1950s, you can use them for historical comparison and establish a relationship among inflation, GDP, and money supply. The report may not have any bearing on predicting spending growth, it can still be handy in identifying if there’s going to be inflation.

 

Things to Watch Out For

It doesn’t really affect the market and has very limited breakdowns, but you can use it to complement the data found in Flow of Funds Report, which is released quarterly. However, money supply moves slower during contraction periods than economic recovery and growth. There is also lack of clear-cut policies on how to interpret levels of money supply against inflation and spending patterns.

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