Where Is the Economy Heading? Velocity of Money Provides Clues
Financial adviser looks at the rate at which money is being spent in the economy for an idea of whether we’ll see a recession in 2023.
You are now subscribed
Your newsletter sign-up was successful
Want to add more newsletters?
Delivered daily
Kiplinger Today
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. Smart money moves start here.
Sent five days a week
Kiplinger A Step Ahead
Get practical help to make better financial decisions in your everyday life, from spending to savings on top deals.
Delivered daily
Kiplinger Closing Bell
Get today's biggest financial and investing headlines delivered to your inbox every day the U.S. stock market is open.
Sent twice a week
Kiplinger Adviser Intel
Financial pros across the country share best practices and fresh tactics to preserve and grow your wealth.
Delivered weekly
Kiplinger Tax Tips
Trim your federal and state tax bills with practical tax-planning and tax-cutting strategies.
Sent twice a week
Kiplinger Retirement Tips
Your twice-a-week guide to planning and enjoying a financially secure and richly rewarding retirement
Sent bimonthly.
Kiplinger Adviser Angle
Insights for advisers, wealth managers and other financial professionals.
Sent twice a week
Kiplinger Investing Weekly
Your twice-a-week roundup of promising stocks, funds, companies and industries you should consider, ones you should avoid, and why.
Sent weekly for six weeks
Kiplinger Invest for Retirement
Your step-by-step six-part series on how to invest for retirement, from devising a successful strategy to exactly which investments to choose.
I often get asked my thoughts on where the economy is heading, and sadly, I don’t have a crystal ball, but I do have several gauges that I use to help determine the direction that the economy might be heading in. One of those gauges is the velocity of money.
Velocity of money is the rate at which money is being spent in the economy. It is calculated by dividing GDP (gross domestic product) by the money supply (M1 & M2). Both M1 and M2 can be used for calculation purposes. Think of M1 as the more focused number. This includes cash and transaction deposits, whereas M2 is larger and encompasses savings, CDs and money markets. GDP is the value of all goods and services in the economy.
The faster money changes hands within the economy, the stronger the economy is thought to be. Therefore, 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, either up or down.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Sometimes the velocity of money can be affected simply by things like rising inflation. During periods of higher inflation, the velocity of money tends to increase. This is why I have been monitoring it more closely this year.
As you know, the Fed has been desperately trying to reduce inflation by raising interest rates in an attempt to slow the economy. One of the ways we check on if its attempts are working is to see if the velocity of money is declining. If not, signs might point to continued elevated inflation.
It's important to note that the velocity of money isn’t the end-all for measuring the economy. The Fed’s manipulation of its balance sheet changes GDP and therefore the velocity-of-money calculation, which some argue makes the velocity-of-money figure less valuable.
I would argue a higher velocity-of-money figure does represent a decent picture of higher inflation, but it is somewhat less reliable when it’s falling. This is why other factors need to be considered in order to make an assumption about the direction of the economy.
So, what are my thoughts? I think we will see a recession in 2023, but that it likely won’t be either deep or prolonged. I think the market has already priced this in, and therefore, a recession won’t have much of a negative effect, 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, everyone’s situation is different, and what you should do could be completely different than what someone else does.
My suggestion is to review your plan with your adviser, and if you don’t have a plan, then you need a financial planning professional to make one for you.
These times are too turbulent to “wing it.”
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate 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 may not necessarily reflect those held by 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. It is suggested that you consult your financial professional, attorney, or tax adviser with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
-
Dow Adds 1,206 Points to Top 50,000: Stock Market TodayThe S&P 500 and Nasdaq also had strong finishes to a volatile week, with beaten-down tech stocks outperforming.
-
Ask the Tax Editor: Federal Income Tax DeductionsAsk the Editor In this week's Ask the Editor Q&A, Joy Taylor answers questions on federal income tax deductions
-
States With No-Fault Car Insurance Laws (and How No-Fault Car Insurance Works)A breakdown of the confusing rules around no-fault car insurance in every state where it exists.
-
For the 2% Club, the Guardrails Approach and the 4% Rule Do Not Work: Here's What Works InsteadFor retirees with a pension, traditional withdrawal rules could be too restrictive. You need a tailored income plan that is much more flexible and realistic.
-
Retiring Next Year? Now Is the Time to Start Designing What Your Retirement Will Look LikeThis is when you should be shifting your focus from growing your portfolio to designing an income and tax strategy that aligns your resources with your purpose.
-
I'm a Financial Planner: This Layered Approach for Your Retirement Money Can Help Lower Your StressTo be confident about retirement, consider building a safety net by dividing assets into distinct layers and establishing a regular review process. Here's how.
-
The 4 Estate Planning Documents Every High-Net-Worth Family Needs (Not Just a Will)The key to successful estate planning for HNW families isn't just drafting these four documents, but ensuring they're current and immediately accessible.
-
Love and Legacy: What Couples Rarely Talk About (But Should)Couples who talk openly about finances, including estate planning, are more likely to head into retirement joyfully. How can you get the conversation going?
-
How to Get the Fair Value for Your Shares When You Are in the Minority Vote on a Sale of Substantially All Corporate AssetsWhen a sale of substantially all corporate assets is approved by majority vote, shareholders on the losing side of the vote should understand their rights.
-
How to Add a Pet Trust to Your Estate Plan: Don't Leave Your Best Friend to ChanceAdding a pet trust to your estate plan can ensure your pets are properly looked after when you're no longer able to care for them. This is how to go about it.
-
Want to Avoid Leaving Chaos in Your Wake? Don't Leave Behind an Outdated Estate PlanAn outdated or incomplete estate plan could cause confusion for those handling your affairs at a difficult time. This guide highlights what to update and when.
