Markets pay undue attention to the monthly US payroll numbers, which are at best a coincident economic indicator and are often revised heavily.

The latest figures show a rise in private sector employment of 235,000 in the three months to August, down from 450,000 in the prior three months. Such a slowdown was to be expected given a fall in GDP growth from 3.7% annualised in the first quarter to 1.6% in the second.

Commentators were relieved that private jobs continued to increase in August, by 67,000, with some having feared a contraction, signalling the dreaded "double dip". In fact, such an increase is perfectly compatible with the economy having entered a recession last month, allowing for lags and the usual margin of error. The news content of today's release, therefore, is minimal.

Monetary trends, unlike labour market developments, lead demand and output, typically by about six months. A firmer reason for optimism that the economy will avoid a double dip is a recent stabilisation and pick-up in real M1 growth – see first chart.

In other news today, the UK purchasing managers' services survey for August confirmed the message of slowdown delivered by the earlier manufacturing survey. A weighted average of the new orders / business indices from the surveys suggests a fall in GDP growth to about 0.5% in the current quarter from a break-neck 1.2% in the second quarter – second chart. This is hardly grounds for MPC doves to push the "panic" button, particularly as survey inflation indicators remain elevated.

Posts since the spring have suggested a defensive investment stance on equities and other "risk" assets, for two reasons. First, the annual growth rate of G7 real narrow money, M1, fell beneath that of industrial output in February (firm data available in early April). Historically, equities have underperformed cash on average under this condition, while outperforming significantly when real M1 has outpaced output.

Secondly, the US monetary base started to contract in early 2010 – markets have exhibited a lagged correlation with base fluctuations since the Federal Reserve embarked on "QE1" in late 2008. The fall in equities from April followed a decline in the US monetary base from late February while the slide in markets during August may have been a lagged response to Eurozone base weakness from early July – see first chart.

Both factors, however, may now be improving at the margin.

The six-month increase in G7 real M1 has recovered recently, with a move above slowing industrial output expansion possible in August – second chart. A convergence of annual growth rates, however, is unlikely before late 2010 – a "safety-first" strategy would be to wait for this signal before turning more bullish.

The US and Eurozone monetary bases, meanwhile, appear to be stabilising after their declines. Central banks are likely to maintain an ample liquidity supply in the near term given jittery markets and "double-dip" worries, with a rise in the US base possible if the Fed moves to "QE2" or asks the Treasury to suspend the supplementary financing programme (which has effectively sterilised the reserves impact of $200 billion of Fed securities purchases). Again, however, it may be advisable to await such steps before abandoning caution.

Chinese monetary base developments may also be relevant: annual growth has been strengthening, in contrast to a slowdown in the M2 and M1 money supply measures – third chart. Interestingly, the Chinese domestic "A" share market has outperformed global equities recently: the FTSE / Xinhau China "A" all-share index rose by 4.1% during August versus a 4.7% decline in the S&P 500.

Bank of England Governor Mervyn King and other MPC members continue to claim that the current inflation overshoot reflects transitory factors including the weak exchange rate and higher global energy prices, while underlying inflationary pressures are weak. This is not supported by a national-accounts-based measure of domestic inflation.

The “implied deflator for gross value added at basic prices” measures the domestic cost – in terms of wages, profits and rents – of producing a unit of output. It excludes, by construction, indirect taxes and import prices, including the cost of imported energy and other commodity inputs. The GVA deflator rose by 2.5% in the year to the second quarter and by an annualised 3.2% in the latest six months. 

These numbers probably understate domestic inflationary pressures because the GVA deflator implicitly assumes that the recent VAT rise was passed on in full to buyers of goods and services. In practice, part of the increase will have been absorbed by suppliers in the form of lower wages, profits or rents. The deflator for GDP at market prices – which adds in indirect taxes – rose by an annual 4.1% in the second quarter. Assuming 50% pass-through of indirect tax changes, the annual GVA deflator rise would have been 3.3% rather than 2.5% in the second quarter if VAT and other rates had remained stable (i.e. the average of 2.5% and 4.1%).

The annual increase in consumer prices has averaged 0.6 percentage points less than that of the GVA deflator since the MPC’s inception in 1997 (i.e. 1.8% versus 2.4%). This shortfall, however, partly reflects falling import costs in the late 1990s and early 2000s due to globalisation and sterling strength. With import prices now adding to, rather than subtracting from, domestic pressures, a rise in the GVA deflator of 2.5% per annum or more is likely to imply a continued overshoot of the 2% CPI inflation target. 

Key UK money supply measures were unchanged in July but have grown at a faster pace since early 2010, supporting hopes of a continued economic recovery. Corporate liquidity, in particular, has improved further. Unusually, households failed to expand their money holdings last month, probably reflecting a combination of low interest credited, an ongoing switch into mutual funds and use of spare cash to repay borrowing.

• Broad money (i.e. M4 holdings of households, private non-financial corporations and financial corporations excluding intermediaries) stagnated in July but has still grown at solid annualised rates of 5.6% and 5.9% over the last three and six months respectively.

• Narrow money M1, comprising currency and overnight deposits, was also unchanged but has grown by 8.3% annualised over the last three months and by 7.6% over the last year. M1 is universally ignored by economists but is usually a better leading indicator than broad money: it contracted as the economy entered a recession but recovered strongly in mid 2009 ahead of the current GDP upswing – see first chart.

• Within broad money, non-financial companies' holdings rose by 0.9% in July, pushing annual growth up to 4.0%. Excluding the troubled real estate sector, the corporate liquidity ratio (i.e. bank deposits divided by bank borrowing) is at the top of its historical range, suggesting a continued recovery in business spending – second chart.

• Very unusually, households' broad money holdings were unchanged in July – the only previous month since 1997 when they failed to expand was October 2008, when financial stability concerns led to a flood of cash out of banks and building societies into Treasury bills, gilts and national savings instruments. (Monthly statistics begin in 1997; quarterly figures going back to 1963 have never recorded a fall.) There has been no such "safe-haven" flow recently but households have been switching into mutual funds, net retail sales of which totalled £2.1 billion in June (July figures are due next week). In addition, interest credited to accounts has slumped in line with deposit rates, while higher lending / deposit spreads may be encouraging some borrowers to use any spare cash to repay debt.

• There was broad demand for gilts in July, with banks, foreign investors and private non-banks buying respectively £4.8 billion, £5.6 billion and £6.7 billion. Banks have increased their holdings by £25.7 billion since "QE" was suspended in January.