This post is an abridged excerpt from the June 16 Wall Street Examiner Professional Edition Treasury update. Click here to try the service risk free for 30 days and get this week’s complete Treasury and Fed reports and all updates, along with other weekly and monthly reports essential for understanding where the markets and the US economy are headed.
Month to date Federal withholding taxes as of June 15 were down 5.5% from last year, negating the monthly gain shown in May. That gain was primarily due to the calendar anomaly of a payment date for a biweekly and semimonthly pay period for many employees coming on June 1 last year. That resulted in an understatement in May’s 2010 receipts and an overstatement for June last year. Therefore the 5.5% decline so far this month versus last June makes things look worse than they are. The truth, as shown in the chart below, is that tax receipts over the last rolling monthly period are about even with last year, suggesting that the economy has stalled, but has not collapsed to the degree implied by a 5.5% decline.
The one month moving average of daily withholding tax collections is at about the same level as last year. May’s gains have dissipated. The 13 week moving average is sinking fast and should be hitting bottom now. It is at roughly the same level as last year. Normal seasonality has a flat period through Q3, with a drop into the low in September/October. If this graph drops below last year’s level from here, then the economy probably is in free fall. That would be very bad news in terms of the levels of debt the Treasury must float in the months ahead.
(From 5/19/11) There’s no sign of upward momentum in this chart. Things should turn more negative as stimulus spending recedes and other government spending is cut. This will coincide with the ending of Fed money printing. That should all result in a continued economic slowdown, and lower revenue collections leading to bigger deficits and greater than forecast Treasury supply.
Looking at other taxes as of June 15, excise taxes were down 8% versus last year. Corporate taxes were down 9.3%. Quarterly income taxes are due on June 15. The April 15 quarterly tax take was only down 6% y/y. The drop in excise and corporate taxes are bad signs for the economy, and again suggest that the government will need to borrow far more in the months ahead than the Treasury had expected based on its rosy economic assumptions. The Treasury market could be in for a shock when the size of new auctions start coming in much larger than anticipated.
June is the peak month for corporate taxes. It’s clear that the trend of corporate tax receipts remains negative. The old joke is that businesses keep two sets of books. My bet would be that corporations inflate the earnings that they report to Wall Street and show the real story to Uncle Sam. The downtrend there is not a pretty picture.
However, I do recognize that US corporations are earning and keeping profits offshore. That’s good for their executives and bad for the American people. Is that good for the stock market? Is it good for stock prices? Does it justify higher PE ratios? That’s bulls’ argument of the bulls. Needless to say, I don’t agree.
Reviewing other items tax refunds show a $4.6 billion drop this year for the first half of June vs. last year. Outlays net of debt redemptions show a $6.5 billion drop as of mid month. These items represent a sharp reduction in economic stimulus, and that will only get worse in the months ahead as government budget cutters wield their axes. Here we could have the worst of both worlds. Falling outlays will reduce economic activity, but revenues could fall faster, increasing the rate of government borrowing. The result could be a vicious cycle burdening the markets with unexpectedly greater levels of Treasury supply that will suck up any available capital and probably force stocks to be liquidated.
The one bright spot in the Daily Treasury Statement, which is inconsequential in terms of total revenues but has some significance as an economic indicator, is in individual non-withheld taxes. They were up by $900 million to $2.4 billion in mid June versus the same period last year. Again, June 15 is a quarterly estimated tax due date, so clearly some small business people were doing well this year.
Treasury cash was $126.4 billion on June 15 versus $85 billion last year this point. The government has built up a huge war chest in anticipation of the debt ceiling problem. With weak tax receipts in June, that money will be gone quickly.
Back in January I wrote that the Fed’s pumping was causing rapidly increasing input costs that are squeezing both corporate profits and consumers’ ability to maintain discretionary spending. I said that these forces should eventually result in diminishing economic activity. To that extent, the apparent beneficial economic effects of QE2 would be self limiting. These forces have played out as expected over the ensuing 5 months.
(from 4/29/11) Deficit spending and tax refund cash has been distorting the economic data, making it look better than it would in the absence of these oceans of cash. As stimulus is withdrawn and the government delays other spending, and as tax refunds fall from $111 billion in February to zero over the next couple of months, the economic data should weaken dramatically. That should lead to lower revenues, bigger deficits, and more Treasury supply later this year.
We are now seeing these forces play out in real time. With the Fed now set to end its program of quantitative easing for the time being and government spending set to decline, the squeeze should worsen in coming months. A scramble for the liquidity needed to absorb huge waves of Treasury supply is likely to cause massive dislocations in both the economy and the markets.
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