A recent post suggested that the surprise of the next six months would be the speed of the turnaround in labour markets. US payroll employment continued to decline in November but the fall of 11,000 was much smaller than expected while earlier months' figures were revised up substantially.

The details of the payrolls survey were also encouraging, showing rises in weekly hours and temporary jobs – both tend to lead overall employment. The unemployment rate, based on a survey of households, retreated from 10.2% to 10.0% last month but this partly reflected a contraction of the labour force while an equivalent jobs measure from this survey was weaker than "official" payrolls.

The official series looks poised to  grow from December, judging from a jobs gauge based on the ISM manufacturing employment index, the monthly lay-off tally by Challenger, Gray and Christmas and the NFIB small firm hiring plans index – see chart.

Better labour market news will reduce worries about a "double dip" but will call time on current super-loose monetary policies, suggesting the removal of an important support for equity markets and other "risky" assets in early 2010.

GDP can be measured in three ways, by summing output, expenditure or income across the economy. The Office for National Statistics (ONS) relies on output information for early estimates of GDP growth, with expenditure and income data incorporated during the subsequent revision process.

The fall in GDP in the third quarter was last week revised from 0.4% to 0.3%. Many economists expect a further upgrade as the ONS improves its measurement of output and incorporates more information on expenditure and income. These hopes, however, are not supported by early data based on the alternative approaches.

Separate output, expenditure and income measures of GDP can be calculated from background information supplied by the ONS. The output measure fell by 0.3% last quarter – the basis for the published GDP drop – but the expenditure and income measures registered larger declines of 0.5% and 0.9% respectively. (These figures refer to "unaligned" estimates excluding adjustments to reduce discrepancies between the three approaches.)

The chart shows published GDP at constant market prices, indexed to calendar 2005, together with the three underlying measures. In level terms, the expenditure measure was in line with published GDP last quarter but the output and income measures were lower. A simple average of the three was 0.2% below published GDP. This indicates that the published measure already incorporates an assumption of future upward revisions to underlying data.

The chart also reveals a disagreement between the three measures about the start-date of the recession, with output – and published – GDP peaking in the first quarter of last year but the expenditure and income measures one quarter later.

Recent sluggish broad money growth in the US and UK is unlikely to signal economic weakness since investors are voluntarily shifting out of cash in response to low interest rates and perceived opportunities in markets. Reduced money demand releases additional liquidity to support economic expansion.

In further evidence of this shift, UK retail buying of mutual funds (unit trusts and OEICs) was again solid at £2.4 billion in October, according to Investment Management Association figures. Inflows are on course to exceed £25 billion for the year as a whole, well above the previous annual record of £17.7 billion in 2000.

The chart shows six-month growth in "M4 excluding other financial corporations" – i.e. money holdings of households and non-financial firms – together with a six-month running total of retail mutual fund flows, expressed as a percentage of the M4 measure. Fund buying has been on a similar scale to the rise in the money supply recently.

In the current context, the sum of money growth and mutual fund flows is probably a better guide to liquidity support for the economy than M4 itself. This indicator – the green line in the chart – bottomed in late 2008 and recovered significantly during the first half, with faster expansion maintained recently. This supports hopes of an imminent economic pick-up. (See previous post for a similar US analysis.)

The Bank of England's favoured broad money measure – M4 excluding money holdings of "intermediate other financial corporations" (i.e. companies classified as non-banks that act as a conduit for interbank business) – contracted by 0.7% in October following a 0.8% September decline. This suggests a serious monetary deficiency that threatens to abort an economic recovery.

On closer examination, however, these falls are entirely explained by a large drop in M4 held by other financial corporations (OFCs) not classified as "intermediate". By contrast, the combined money holdings of households and non-financial corporations – i.e. M4 excluding all OFCs – rose by 0.3% and 0.2% respectively in September and October, with annual growth reaching an eight-month high of 2.9%. This suggests that liquidity created by official gilt-buying is filtering down to "end-users" responsible for spending decisions.

The large fall in money holdings of "non-intermediate" OFCs, moreover, appears to be an artefact of the Bank of England's seasonal adjustment procedure. This grouping includes insurance companies and pension funds, investment and unit trusts, other fund managers and securities dealers. M4 holdings contracted by a seasonally-adjusted £29 billion, or 9%, in September and October (see Bankstats table A2.2.3, T6, column 4). Yet non-seasonally-adjusted figures show a decline of only £5 billion (derived by summing changes for the listed industries in table C1.1, T95-96). The £24 billion discrepancy accounts for the entire decline in M4 excluding intermediate OFCs in September and October.

An alternative approach is to use the non-seasonally-adjusted money holdings of "non-intermediate" OFCs when calculating the M4 measure. This is defensible on two grounds: it is unclear why these holdings should exhibit a seasonal pattern and there is insufficient history to estimate reliable monthly seasonal factors. On this basis, M4 excluding intermediate OFCs rose by 0.3% in October after a 0.2% September drop. While still weak, this is probably consistent with economic growth since the demand to hold broad money has been depressed by low deposit rates and reviving risk appetite.

Other features of the October monetary data support optimism about economic prospects. Narrow money M1 has accelerated strongly, rising at a 16% annualised rate over the last three months – see chart. Meanwhile, there were further rises in October in the corporate liquidity ratio (i.e. non-financial companies' sterling and foreign currency money holdings divided by their bank borrowing) and mortgage approvals for house purchase, to their highest levels since September 2007 and March 2008 respectively.