Mea Culpa- The US Economy Did Not Crash in December – 1/4/24

Yesterday I posted a report on the plunge in the withholding data. Non-subscribers, click here for access.

Subscribers, click here to download the report.

That conclusion may not have been correct. A reader brought to my attention that there was apparently a tax law effect. Another tax tracking service estimated that the effect of this change was 17%, so that there would have been a net year to year gain of 6.1%. This would have been the rate of change, in the absence of the effect of deferment of withholding in the prior year due to pandemic relief legislation. December 2022 was the giveback.

In reviewing the data, I noted that there was a 21% surge in year to year withholding tax collections in December 2022. You can see that on the withholding tax chart in the report. Non-subscribers, click here for access. Therefore the effect of the tax deferment may well have been 17%, or close to it. The analysis of that impact appears to be accurate.

Assuming the adjusted figure of a year to year gain 6.1% is correct, then the real growth rate would have been 2% based on recent BLS earnings inflation reported at 4%.  The adjusted data presented in the other report claims that withholding growth was equivalent to the BEA rate of wage inflation at 6%. That implies zero job growth.

I apologize that my analysis posted yesterday appears to be materially incorrect because of this factor. However, my broad conclusions remain the same. There’s still lots of Treasury supply on the way. The deficit will apparently not grow beyond the official forecast but it remains enormous and isn’t going away.

In January, the effect of the deferred withholding back in December 2021 that was recaptured in December 2022, will be zero. We’ll then get an apples to apples comp. I will provide an interim update on the January year to year change during the month.

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The hourly chart of the ES, 24 hour S&P futures looks like it wants to establish a double bottom here, but the hourly oscillators are laying oddly flat in negative territory. That’s typically a sign of a market that is trending lower. If the market doesn’t pick itself up here by the NY open, I would suspect another dump coming.

On the other hand, if it’s above 4707 by the NY open, that should confirm a low. The requisite positive divergence is in place. Then the next step needed to confirm a rally would be to clear 4720 this afternoon.

Meanwhile, 10 year Treasury yield indications look set up for a move higher. Next step is to clear 4.02% then 4.08. Up up and away if so. Macro Liquidity – The Party’s Over