The Good News About Slow-Motion Money

One of the more obscure indicators economists use to gauge the strength of the economy is money velocity. In essence, this is the speed at which a dollar moves from one transaction to another. The more times a dollar is used to buy something, the greater its velocity, and the quicker the economy grows.

More than four years after the recession ended, you’d think money would be cycling through the economy at a faster rate than a few years ago. But you’d be wrong. Dating to 1959, money has never moved through the U.S. economy at a more glacial pace than it has over the past year. As of the third quarter of 2013, the velocity of the M2 money supply—cash and checking deposits, plus “near money,” which includes savings accounts, retail money market mutual funds, and CDs—was 1.5, according to data tracked by the Federal Reserve. This means that of the $11 trillion in bank accounts (not to mention all the cash stuffed under mattresses), each dollar was spent just 1.5 times over the past year. That’s down from 2 times in 2006 and a high of 2.2 times in 1997.