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The Economic Cliff Dead Ahead

I turn 70 in November, and I’m open to the idea that even old farts can learn something new every day. I probably should have known this already, but yesterday I learned that unemployment benefits are taxable, and usually withheld. And wow, what a difference that makes!

I track data on real time Federal Withholding taxes and report that regularly to Liquidity Trader subscribers. My last report on that subject was July 14. I post an update regularly at the end of each month with a look at what the data tells us about the direction of the US economy. That gives us a heads up on what the economists will see, and the media will report, when the mainstream media subsequently misreports the official massaged economic stats for that month.

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It’s nice to know what already happened before the mainstream media gets a clue and misreports it.

I was so stunned by what I saw yesterday that I wanted to break it to everyone right now.

The withholding tax data for July through July 20, showed a 5% year to year GAIN!

How could that be? Are we in an unrecognized employment boom? No.

What we’re seeing is the fact that unemployment benefits are taxable, that some states withhold taxes automatically, and that others allow withholding to be at the choice of the beneficiary. Since most of us are accustomed to having taxes withheld from our paychecks, it stands to reason that when unemployed, we would take that option to avoid a nasty tax bill later. The fact that around 17 million Americans are collecting enhanced unemployment benefits, in some cases exceeding their previous paychecks, has boosted withholding tax collections.

So, by the way have IRA and 401K distributions, which are also subject to withholding.

So with many people cashing out their retirement plans, added to the unusually generous benefits enacted under the CARES act for economic relief from the pandemic, you get a windfall of tax collections, despite massive unemployment.

But alas, one pay period does not a trend make, and on the following day, July 21, the collections for a rolling half month period had plunged again to -13.4%. That kind of volatility makes it seem like the data can’t be analyzed, but as always, a little technical analysis comes to the rescue.

Looking at a 5 day moving average it’s clear that the trend has been improving since mid June. Ah, but what does that mean? Is the economy adding jobs?

Federal WIthholding Tax Collections - July

Maybe, but the tax collections are boosted by those 17 million or so who are collecting enhanced unemployment benefits and/or cashing out their 401Ks.

The enhanced benefits end this week. That income, and the associated taxes, are about to disappear, to be replaced by a far less generous benefit. And there may be a gap of a few weeks where there are hardly any benefits paid at all. So this line will be plunging.

Meanwhile, despite those benefits helping to short circuit the May collapse, we still see a trend of lower highs in collections. The monthly moving average is slogging along around a 13% year to year decline. Only trillions in government support are preventing abject economic collapse. How long that support continues, and at what level, are the great unknowns. If it stops, we’re instantly in a Depression, if we’re not already.

The virus is raging in the 3 most populous US states and throughout the South, Southwest, and West. Most people won’t spend freely under these conditions, even if they still have a job, or income, or stock trading profits.

That trend is holding back most of the country now. Even the Northeast is fighting what could be a losing battle against rising case numbers and hospitals threatened with being overburdened again. More importantly, people are worried. And worried people don’t spend freely.

What does it mean? The US economy will get worse. The Fed will keep printing money and pumping it into Primary Dealer accounts. And the dealers will keep buying and marking up inventory for as long as they see willing suckers at the tables.

There are indicators that tell us when the dealers are tightening up, or likely to. I track them for you at Liquidity Trader. Now is one of those rare historical times when the dealers may be doing just that.

As an investor or trader, follow the money–find the profits. Liquidity Trader enable you to do that. Follow the money risk free for 90 days.

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish, and was lead analyst for Sure Money Investor, of blessed memory. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities. Prior to starting the Wall Street Examiner I was a commercial real estate appraiser in Florida for 15 years. I was considered an expert in the analysis of failed properties that ended up in the hands of bank REO divisions, the FDIC, and the RTC. Remember those guys? I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. I'm not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I've watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I'm happy to share that experience with you, right here. 

  1 comment for “The Economic Cliff Dead Ahead

  1. Thomas P Steeley, Jr.
    July 23, 2020 at 8:28 am

    “Only trillions in government support are preventing abject economic collapse.”

    It’s not that I do not understand the spirit of this statement, but government cannot prevent an economic collapse, they can only redistribute the losses through taxation, monetary inflation or unproductive borrowing (and the vast majority of all government borrowing is unproductive, or is not self-liquidating).

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