Monetary trends and the latest Federal Reserve bank loan officer survey are signalling slower US economic expansion in the first half of 2014. This would confound, again, Keynesian forecasters, including the IMF, who expect growth to strengthen as “fiscal drag” lessens*.

The monetary measure emphasised here is six-month growth of real narrow money, i.e. currency plus demand deposits deflated by consumer prices. This has displayed increased amplitude in recent years but peaks and troughs continue to lead turning points in industrial output expansion, with an average lead since 2008 of 11 months – see first chart. Real money growth peaked in December 2012 and fell significantly during the first half of 2013, suggesting a loss of economic momentum from late 2013.

The latest Fed loan officer survey, meanwhile, reports that a net -4% of banks tightened credit standards on loans to small firms in the three months to January. This is still an expansionary reading by historical standards but compares with a low of -23% in May 2013. The credit tightening balance is an inverse short-term leading indicator so this rise also suggests a growth peak in late 2013 – second chart.

The survey, in addition, confirms other evidence of a faltering housing recovery, with the net percentage reporting stronger mortgage demand** plunging to -37%, the lowest since 2008. The mortgage demand balance correlates with home sales: the fall in transactions late last year may extend in early 2014 – third chart.

Real money trends and the lending survey, it should be emphasised, remain consistent with respectable economic growth. Economic news, in other words, may disappoint the optimists without being weak enough to prompt the Fed to stop “tapering”.

*US GDP grew by 1.9% between 2012 and 2013 and by 2.7% in the year to the fourth quarter despite a fall in the “structural” fiscal deficit of 2.3% of GDP in 2013, according to the IMF. The deficit is projected to decline by 0.8% of GDP in 2014.
**All residential mortgages until Q1 2007; average of prime and non-traditional balances after.