The mainstream consensus has lately been that the economy is slowing. Based on my tracking of federal revenues in real time, I suspect that that view is incorrect. Instead the recent data reflects only normal oscillations within the ongoing slow growth trend.
The following is an excerpt of the Wall Street Examiner Professional Edition Treasury Market update posted Friday, July 13, 2012. Click here for subscription information.
Total federal tax collections, including withholding taxes, are available to us with just a one day lag in the US Treasury’s Daily Treasury Statements, which makes them an excellent analytical resource. Withholding is mostly for compensation, and thus it is a good measure of the economy’s strength. However, it is extremely volatile day to day so I rely more on a monthly moving average of the 10 day total collections, comparing that with the prior year. Smoothing sacrifices a bit of timeliness to get a clearer picture of the trend without losing too much of the edge that the daily data provides. Unfortunately, I have found even the 10 day total data too noisy for meaningful comparison so I’ve had to resort to additional smoothing. As a result the smoothed data is a little slow, so I also look at raw month to date data after mid month.
As of July 11, the 4 week average of the 10 day total of withholding taxes is now up 4.0% in nominal and 1.8% in real terms versus the same period in 2011 (adjusted by the monthly BLS data on average weekly employee compensation which in June rose by 2.2% year to year). This indicator has been in the +1% to +3% range since mid May, with most of that time above +2% suggesting that the economy’s current rate of growth is 2-3%, not the 1-1.6% that most Wall Street conomists are now forecasting.
Last week was the benchmark week for the BLS labor market data. At a growth rate of 1.8% versus last year, non farm payrolls, not seasonally adjusted (NSA)–in other words, actual–would grow from last year’s July level of 131.038 million to approximately 133.4 million. Such a straightforward analysis doesn’t always match the seasonally adjusted headline number because seasonal adjustment factors have a significant variance for the same period in each year. The resulting seasonally adjusted number is therefore somewhat arbitrary, and anything but real. Unfortunately, the markets don’t really care about that when the data is initially released. Traders and algos only care whether the number beat or fell short of equally arbitrary consensus estimates, which in turn depend almost entirely on the seasonal adjustment variance.
If the withholding tax growth rate is applied to the SA payrolls data for July 2011, (1.0183 x 131.407 million) the SA number for July would be 133.812 million. That would be an increase of over 720,000 from the current June figure. Wouldn’t that be an August surprise (when released? But we know that’s not going to happen. The growth rate of withholding and the growth rate of jobs will remain at odds. But unless economists are forecasting very strong gains, the July number would beat if it tracks near the withholding data (More employment charts).
The full figures for the month are available a day after the end of the month. Here’s what they looked like at the end of June along with my observations at the time.
7/6/12 As of June 29, the last business day of the month, month to date withholding tax receipts for the full month were up by 0.9% over the same period last year but that is misleading because there was one more calendar day in which taxes could be reported last year, as well as one more business day in which more people would have been at work. Looking at collections on a per diem basis, they were up 4.4% this June versus June 2011. On a per workday basis, the gain was 5.7%. This further supports the thesis that the seasonally adjusted jobs data for June was grossly misleading.
6/9/12 As of May 31, month to date withholding tax receipts for the full month were up by 2.1% versus the same period last year, on a nominal basis, not adjusted for inflation.
May 31 month to date outlays were up by $24.2 billion pushed up somewhat after a calendar anomaly pushed expenses usually incurred in April into May, contributing to the bogus budget surplus in April. Conversely, the May deficit increase may also be an illusion.
7/6/12 Month to date outlays for the full month as of June 29 were up by $9.7 billion, absorbing nearly all of the revenue gain. The Administration will continue to spend as much as possible to boost its chances of getting rehired.
June 15 was quarterly corporate tax collection day. Corporate taxes for the month were 16% ahead of last June’s collections. Some of this is due to improved business conditions, but if corporations are achieving this by cutting labor costs, that would be counterproductive over the long haul. The withholding tax data and raw unadjusted jobs data suggests that businesses were hiring.
Excise taxes are due for the quarter at the end of June. This year they were up 5.9% over 2011.
The Treasury releases its final monthly budget figures on the 8th business day after the close of the month, so this too is timely data offering a fascinating glimpse into the economy.
The Treasury’s monthly statement for June showed a net revenue increase in nominal terms of 4.2% year over year. These are net revenues after refunds. Refunds for June are mostly tied to the prior year. Gross collections are more representative of the current period. Here are the comparisons by category on a net and gross basis.
Wage withholding was down 5.5% in June versus June 2011, falsely suggesting a weakening economy. That was completely due to the last business day of the month falling on June 29. Semi weekly and twice monthly withholding for the end of June would be delayed into July. In fact, $23.3 billion in withholding taxes were remitted on July 2. That’s one third of all the withholding taxes previously collected in June. Conversely, July will look like a blockbuster month because of that. We’ll have to keep that in mind when reviewing next month’s statement.
Social security taxes were up 3.7%, which is really impressive considering the calendar effect.
June is a quarterly estimated tax collection month. Self employment tax collections were up 3.2%. Those were due on June 15, so there are no calendar issues involved. That’s a decent indication of the strength of the economy in the second quarter, but it implies nothing about July. Considering inflation, it suggests real growth of around 1-1.5%.
The Fed earned and paid the Treasury less than last year as interest rates plunged. The Fed does not mark to market. The surplus it returns to the Treasury is a result of interest income and sales. It made money in May when it closed sales of some of its Maiden Lane holdings.
Year to year, revenues had been uptrending slightly suggesting modest economic growth. Meanwhile the deficit, which had been narrowing, grew materially wider in June. It had also widened in May. While revenues are climbing, the Obama administration has spent all of that and then some. It is, after all, election season, time to buy votes with strategic, economy boosting, government spending.
This report is an excerpt from the weekly Treasury market update in the Wall Street Examiner Professional Edition. The Report also includes a review, analysis, and forecast of the past week’s and next week’s Treasury auctions, expected supply impacts on the market, analysis of demand via updated charts and discussion of Primary Dealer, foreign central bank, and US commercial bank buying trends, as well us US bond mutual fund flows. Also included are technical analysis of the Treasury bond market, and US dollar.
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