I’m often asked what I think about where the economy is going, and unfortunately I don’t have a crystal ball, but I do have several benchmarks to help determine the direction the economy might be headed. One of these criteria is the velocity of money.
The velocity of money is the rate at which money is used in the economy. It is calculated by dividing GDP (gross domestic product) by (opens in a new tab) with money supply (M1 & M2). Both M1 and M2 can be used for calculation purposes. Think of M1 as a more focused number. This includes cash and transaction deposits, while M2 is larger and includes savings, CDs, and money markets. GDP is the value of all goods and services in the economy.
The faster money changes hands in the economy, the stronger the economy. So if we see a trend in either direction, we can assume that the economy is getting better or worse depending on the direction of the velocity of money, up or down.
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Sometimes the velocity of money can be affected by simple things like rising inflation. During periods of higher inflation, the velocity of money increases. That’s why I monitored him more closely this year.
As you know, the Fed is desperately trying to reduce inflation by raising interest rates to slow the economy. One way to test whether his experiments are working is to see if the velocity of money is falling. If not, signs may point to continued elevated inflation.
It is important to note that the velocity of money is not the end point for measuring the economy. The Fed’s manipulation of its balance sheet changes GDP and thus the calculation of the velocity of money, which some argue makes the velocity of money data less valuable.
I’d argue that while the higher velocity of money figure paints a decent picture of higher inflation, it’s a little less reliable when it’s falling. Therefore, other factors must be taken into account in order to draw conclusions about the direction of the economy.
So what are my thoughts? I think we’ll see a recession in 2023, but it’s unlikely to be deep or long-lasting. I think the market has already assessed this and therefore the recession will not have major negative effects, if any, on the stock market.
This is purely my opinion.
As a result, I am buying more stocks now than I have all year and will likely continue to do so.
Remember that everyone’s situation is different and what you should do may be completely different from what someone else does.
My suggestion is to review your plan with your advisor, and if you don’t have one, you need a financial planning professional to make one for you.
These times are too turbulent to “shake off”.
Securities offered by Kestra Investment Services, LLC (Kestra IS), Member FINRA/SIPC. Investment advisory services provided by Kestra Advisory Services, LLC (Kestra AS), a subsidiary of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and do not necessarily reflect the opinions of Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. We suggest that you consult your financial professional, attorney or tax advisor regarding your individual situation. To view the CRS form, visit https://bit.ly/KF-Disclosures (opens in a new tab).
This article was written by and represents the views of our contributing consultant, not the Kiplinger editorial team. Advisor records can be checked with the SEC (opens in a new tab) or with FINRA (opens in a new tab).