This is an excerpt from the Federal Revenues Pro Trader Report. Subscribers, click here for download links.
Withholding tax collections started to recede in late August and early September after a blockbuster month. The normal 3-4 month cycle in these collections appears to be still in force, with the weak side of the cycle now under way, due to continue into October-November. We won’t know whether the weakening will signal a recession unless and until the level of collections reaches the July low. We will continue to track this weekly in this report.
The numbers have been consistent with real GDP growth reported at 2-2.5%.The BEA just revised its estimate of second quarter GDP up to an annual rate of 3.7% from 2.3%. The average nominal growth rate for withholding taxes in the second quarter was 6.2%. Nobody knows what the rate of inflation really is, but it’s certainly a little higher than the BLS is reporting for CPI and the BEA reports for PCE. The difference between the withholding tax growth rate of 6.2% in he second quarter and the BEA’s latest guess for seasonal adjustment error annualized GDP seems reasonable enough on the surface.
Not that GDP estimates have anything to do with stock prices. It’s just a game that Wall Street pundits like to play. It’s madness, and I succumb to it. Ultimately, the withholding data is real and the GDP data is made up, especially on the initial release. Ditto for the jobs data. At some point the data must hew toward the actual, but that comes later, after the market is no longer paying attention or interested in what the actual trend was in the past, before the government data was revised to more accurately reflect it.
The headline jobs number reporting is another game that we have succumbed to. The reference week for August payrolls showed withholding tax collections were slightly higher relative to last year than they were in July, suggesting that payrolls growth should have been the same as July’s or better. But the July headline number was too low, so they revised that up in the new release today.
The August number is less than what the withholding tax data portended. It should get revised up next month. With the exigencies of the seasonal adjustment factors, we never know how far off the print will be from actual reality. For this month at least, I think that the economists’ models, which had a consensus guesstimate of around 225,000, are closer to the actual trend than is the government’s published fictional number of 173,000.
The other part of the guessing game is the market’s reaction. I wrote the other day in a free post about the weekly jobless claims that if the number missed on the low side it would probably take the market about a half hour to figure that out. Apparently, it figured it out instantly and sold off, mostly on Fedhead Lacker’s comments that now is the time to start raising rates, regardless.
In the end, the only thing that matters for the market is the level and direction of liquidity. There’s less of it lately, so reactions to the news, whatever it is, should continue to skew in a downward direction. As the market weakens and liquidity continues to diminish, that will begin to impact the economy as market-following CEOs, business owners, and consumers all start to pull in their horns. The robust gains in withholding taxes of the past couple of years will begin to slow.
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