LIQUIDITY DRAIN:THE RECORD DECLINE IN M2

Could a Fed Rate Cut Be Bearish?

June 13, 2019

RECESSION WARNING FROM THE LEI

June 7, 2023

In April M2, contracted 4.6% year-over-year. That’s the largest one-year decline since the Federal Reserve began collecting this data in 1959, and it’s a big, red flashing light about our recession risk.

M2 Defined

The money supply (M2) measures the deposits that are on hand at banks across the U.S. Basically, it’s the cash on hand that banks have available to lend out. When the money supply increases, it generally means that there is more money available in the economy for spending and investment. On the other hand, when it falls it means banks have less money to lend, and as a result people lose the ability to spend and invest as much (since it’s harder and more expensive to borrow).

The fact is, M2 has now contracted year-over-year for four straight months, starting in December 2022, which was the first M2 annual decline ever. It’s unprecedented. In the short term, we can expect inflation to ease but at the cost of a slowing economy and reduced spending. This could likely turn into a drag on the equity markets and, left unchecked, result in a full-fledged recession by the end of the year.