Economic News Blog
Posted by: Steven Kline, Jr. 9. January 2019

Monetary Base Signals Peak Capital Equipment Spending Growth

Gardner Business Index Money Supply

December was the 10th-straight month of month-over-month contraction in the monetary base, which was $3.420 trillion, its lowest level since August 2013. The rate of contraction has accelerated almost every one of these 10 months, with December’s rate accelerating to -11.8 percent, which was the fastest since October 2016 and second fastest since August 1937. In fact, this was the fifth month in a row that the one-month rate of change in the money supply contracted more than 8 percent. That has never happened before. While the current contraction is a response to the unprecedented increase in the money supply following the Great Recession in 2008 and 2009 and is completely necessary, it does indicate that there could be unexpected and difficult-to-predict economic events in the future.

As a result, the annual rate of change in the money supply contracted for third month in a row, decelerating to -4.4 percent. This was the fastest rate of annual contraction since July 2017. The annual rate of change peaked in March 2018, indicating that the rate of growth in capital equipment consumption should peak between March 2019 and March 2020 as there is typically a long lead time of 12 to 24 months between changes in the money supply and changes in capital equipment consumption. That said, the lead time has shortened since the Great Recession due to the dramatic effects of the massive amount of money the Federal Reserve created to pump up the economy. 

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