Is Money Burning a Hole in the Consumer Pocket?

Aug 22, 2023 | Macro Insights, No Bull Economics

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We have been hearing from a lot of management teams that the tailwind of spending funded from the remnants of covid saving accounts is coming to an end. Does this mean that consumer spending is set to slow? 

Commentary

  • The faster the velocity of money, the faster the economy is moving as consumers are quick to spend what they make. Conversely, when the savings rate increases, money is sucked out of the economy, slowing GDP growth.
  • We can see that the savings rate is dwindling down in the chart below, suggesting to some that consumer stress is translating into smaller rainy-day funds.
  • However, the chart also shows that M2 velocity is finally beginning to increase with a long runaway left before it reaches pre-covid levels.
  • Taken together, this trend suggests a return to normal as consumers get back to the business of spending more and saving less – hopefully a function of higher consumer confidence!
Velocity of M2 Money and Personal Saving Rate Chart

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