Tax Receipts And the Jobs Number

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Tax Receipts And the Jobs Number

Tomorrow’s US Jobs Report will close out a choppy year for this important economic data point. Consider:

  • There were 2 prints below 100,000 jobs added, in February (56,000) and May (62,000).
  • Some months were over 200,000: January’s 312,000 (the strongest since July 2016), April’s 216,000, August’s 219,000, and November’s 266,000.
  • That variation had a strong effect on the 3-month rolling average that economists use to judge the real strength of the US labor market. This measure whipsawed from a low of 142,000 (February – April) to 248,000 (3 months ending January). The current 3-month average is 205,000 jobs added, well above the 2019 average of 179,000.

Economists are therefore a bit gun-shy about predicting a strong report for December 2019 out tomorrow morning; the current consensus is for 165,000 jobs added. Given the recent vagaries of the data, that’s a reasonable approach. With that data volatility, here’s how we are thinking about this number:

  • The standard deviation of the last 6 jobs added number is 41,000 against a mean of 196,000.
  • That means any report between 155,000 and 237,000 is in the fat part of a normal distribution.

The bottom line here is that any report below 155,000 will signal incremental weakness in the US labor market, and any print over 237,000 will show acceleration. With US equities in rally mode and Fed Funds Futures implying little chance (>20%) of a first half rate cut, markets clearly believe tomorrow’s report will land somewhere in this band. A Goldilocks report, in other words.

In addition to this statistical analysis, we also look at Federal income tax/withholding receipts as a double-check on what the Bureau of Labor Statistics data shows. Unlike the BLS reports, this data from the Treasury Department is not adjusted for seasonality or subject to arbitrary statistical modeling. It comes from the Daily Treasury Statement (DTS, link below), essentially the nation’s checkbook.

Here are the 2 numbers in the DTS that inform our analysis and what they say about the US labor market at present:

#1: Individual Income and Employment Taxes, Not Withheld (Table II of the DTS)

  • Workers who receive 1099s fall into this category, ranging from many real estate agents to contractors and gig economy workers like Uber/Lyft drivers. Their payments to Treasury tend to cluster around quarterly deadlines for filing estimated taxes.
  • December 2019 saw a modest increase in these payments, up 1.6% from December 2018.
  • For the year, however, these payments declined by 3.6%. We attribute this to companies officially hiring workers previously classified as contractors in what continues to be an overall strong labor market.

#2: Withheld Income and Employment Taxes (Table IV of the DTS)

  • These are the payments that come directly from workers’ regular paychecks.
  • December 2019’s receipts were up 4.1% from December 2018.
  • For all of 2019, receipts rose 4.3%. This number foots with 2019’s BLS data, which shows a 1.4% increase in the size of the US labor force this year and an average of 2.9% weekly wage growth.

The upshot from this bit of analysis is that the BLS numbers, squirrelly as they can be, are a reasonable measure of the health of the US labor market and it clearly ended the year on a decent note. Like many of you, we tend to side-eye the monthly Jobs Report (hence our rolling average/standard deviation analysis). But the actual dollars flowing into Treasury don’t lie or obfuscate (to do so would irreparably damage investors’ confidence in US sovereign debt). Last year was a solid one for employment/wage growth, and December was good as well.

Daily Treasury Statement: