I warned in my latest Federal Revenues Report that withholding tax collections had rebounded sharply in late July, to bring the 4 week average of biweekly collections to its biggest gain in several years. That gain reached double digits, something we have not seen since 2011. That report was based on daily data through August 1.
There had been some very weak readings prior to that. Consequently I couldn’t tell whether this was just a snapback to trend, or possibly a sign that the US economy was heading into a blowoff resulting from all the monetary stimulus it has received. That stimulus has been boosted lately as negative interest rates in Europe and Japan causes capital to flee those markets and head straight for the US.
In the Federal Revenue reports, I consider and analyze a variety of Federal Taxes which the US Treasury collects and reports in real time. It’s critical information because it gives us a heads up on how the lagging economic indicators will be reported in the following month.
The 4 week data on the withholding taxes showed the increase in withholding that the month end data could not, due to calendar anomalies. In July of this year, the last day on which taxes could be collected was Friday, July 29. In 2015, the last collection day in July was the 31st. That meant that the collection of taxes due from the last 2 days of July rolled over into August this year. Those collections did not show up in the July number. As a result the year to year change for the month of July was a decline of 1%. That’s how most observers who track this information reported it, and interpreted it.
They missed the boat on that. I reported that the decline was due to the calendar and that a method which ignores the calendar and bases its report on a 4 week period of biweekly collections showed a stunning double digit increase as of August 1. That was higher than any time since the 2010 rebound from the recession. It is true that even on a smoothed basis, withholding collections are volatile, but a couple of weeks of rising collections can’t simply be written off as anomalous. We must look at patterns and trends to see if the move is consistent with those patterns.
In this case it was, which gave us a heads up that the nonfarm payrolls data would be stronger than the consensus expected, when many observers were leaning the other way. In fact, I had been leaning the other way until the last couple of weeks of July when the tax collections began to uptick.
As recently as July 15, collections were running weak, but then something changed. The year to year change in weekly collections was extremely weak at -15.5% but the following week saw a rebound to +27%. The next 2 weeks saw gains of 6.7% and 5.1%. These numbers are not adjusted for inflation. Since most paychecks lag the pay period by a week or two. The uptick in taxes suggested that the early July jobs survey period would be strong.
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The late July uptick was not inconsistent with the typical fluctuations in this data. It was larger than usual, but it was within the trend channel.
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As a technical analyst I respect trendlines and evidence of cycles, concepts which economists never consider. To them, econometric models are science while technical analysis is voodoo. That’s one reason why economists’ forecasts are always wrong. They do not respect technical analysis. It’s similar to their ignorance of the most fundamental rules of double entry accounting. You can’t forecast accurately if you don’t accept reality. Technical analysis and the fundamentals of Accounting 101 provide the framework for understanding how things work in the real world, in particular in technical analysis the understanding of trends, and cycles within trends.
There are many ways of looking at data in the attempt to best understand it. The data on which these charts are based is complete through the week ended August 5. They show the recent uptick in collections versus the weakening that had been under way since the last week of May. However, weekly collections are still well below their late May peak. It is not clear that the recent uptick represents a change of the trend that has reflected a weakening US economy. As a result we need to watch the data closely in the weeks ahead for any sign of a real change in direction.
Get a handle on the real time tax data and what it tells us about the US economy and markets in the Pro Trader Federal Revenue Reports.
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