Tax Receipts As Recession Indicator

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Tax Receipts As Recession Indicator

With all eyes on Friday’s Jobs Report, today we want to talk about US individual income tax payments to the US Federal government. A quick summary of this data set:

  • Every day the US government publishes the Daily Treasury Statement, a 2-page report that is basically America’s checking account. Inflows are mostly individual and corporate taxes. Outflows are everything from entitlement programs to defense.
  • The items of interest to us: “Withheld Income and Employment Taxes” and “Individual Income and Employment Taxes, Not Withheld”. The former is what comes out of your pay stub and is 83% of total individual tax/withholding. The latter is what self-employed individuals/contractors remit to Treasury and is the remaining 13%.
  • We have the September month-end data for each, so we can use that to evaluate trends in the aggregate income for US workers. If they are slowing, that’s a bad sign of course.

Here’s what September’s and YTD 2019’s tax receipt data says about the state of the US workforce:

#1: September’s “Individual Withheld Income/Employment Taxes” were much higher than last year, but a calendar shift makes the real comp somewhat lower:

  • Last month saw a 13.6% increase in individual tax/withholding versus last year, by far the best comp of 2019 (graph below).
  • That is partly due to the calendar, with the pay cycle for late August pushed into September since the month ended on Labor Day weekend.
  • Still, the combined comp for August and September was +7.2%.

#2: Year-to-date Individual Withheld Income/Employment Taxes have been good as well:

  • The YTD comp is +4.4%.
  • January 2019 suffered from some income shifting last year as tax laws changed, with an -11% comparison to 2018.
  • All the other months from February – July show +4 – +10% comparisons the same months in 2018.

#3: The bad news comes from the self employed/contractor part of the US labor market, as the “Not Withheld” tax/withholding data shows:

  • The YTD comp here is -3.6%.
  • For just August and September it is down 4.1%.
  • One explanation: companies are bringing on self-employed workers/contractors as labor markets continue to tighten. Also worth noting: at just 13% of Treasury remittances this cohort is not enough to fundamentally alter the positives from Points #1 and #2.

Our three takeaways from this data:

#1: The tax/withholding data agrees with the Bureau of Labor Statistics reports. By the BLS’s measure, over the last year the US labor force has grown by 1.5% and weekly wages are 2.9% higher. The combination is 4.4%, which is exactly the YTD increase in withheld taxes (even with the wonky January).

#2: While the September 2019 tax data is not clean, there is little that points to a sudden decline in either employment or wages. Yes, the Jobs Report measures marginal hiring while the tax data reflects aggregate employment and wage growth. But the August-September combined comp of +7.2% is solidly in the middle of the 2019 range. Surely it would be weakening if overall labor market conditions were softening at an accelerating rate?

#3: While the data here is generally positive in tone, we don’t want to be complacent about the recent downward trends in the BLS reports:

  • Last month showed 130,000 jobs added.
  • Q1’s average (with revisions): 174,000
  • Q2’s average (with revisions): 152,000
  • July/August averaged 145,000
  • Two months in 2019 were notably weak: February (20,000 reported, revised to 56,000) and May (75,000 reported, revised to 62,000).

The bottom line here: with the current consensus for Friday’s report at 147,000 jobs added, the chance of a miss to that number is high even if the tax data looks solid. The former will only feed the recession narrative, but today’s market action already acknowledges that. The latter, which feeds consumer confidence and spending, may be cold comfort just now but on a big down day it is a useful reminder that the stock market is not the economy.