M1 Measure May Reflect Weaker Job Market

Money supply readings may indicate that the labor market is weakening.

The latest data from the Federal Reserve show that, despite further injections of liquidity into the financial system through a myriad of channels, the money supply as measured by M1 contracted for the month of April.

The fall mimicked the drop in November, where M1 also fell by 0.31%, which is quite a large decline for the monthly readings for M1. And it seems as though the Fed rate cuts didn't lift M1 in the meantime.

M1 can generally be viewed as a gauge of transactional activity in the economy and is a good way to get an angle on how the economy is performing.

Demand deposits are a large component of M1 and are predominantly used for payments made in the economy. Businesses use these types of deposits in the payment of wages and to discharge credit obligations (accounts payable). So, businesses appear to be requiring less demand deposits to conduct day to day operations.

Wages are one of the largest expenses on the income statement of most businesses. If the need for demand deposits falls, we can conclude with some confidence that the wages expense may have fallen. That, in turn, signals a decline in payrolls.

Note that the M1 data are for April, as the data for May are not yet available -- but the size of the decline is the main point and this, coupled with the ability of M1 to at times be a lead indicator, lends weight to this argument.

Friday's data will shed more light on the state of the labor market.