Despite the new highs and the great growth and yada yada yada... we are on the brink of a recession. I have the numbers to prove it.
And the numbers don't lie.
Data on federal tax collections comes to us in real time every day, courtesy of the U.S. Treasury. This is unmassaged real data, not the endlessly finagled economic data put out by various other U.S. government agencies. Tracking the tax data regularly enables us to see how the U.S. economy is actually behaving versus how the government wants you to think it's behaving.
That's important because the current data tells us something really big about the U.S. economy that nobody knows yet. It won't show up in the official GDP data for months, but it could rock the markets and cause the Fed to change course.
Here's the big news.
Nobody Is Looking at These Tax Numbers - and the Drop Will Catch Them Flat-Footed
Withholding tax collections plunged in the second half of November, suggesting that the United States is on the brink of, if not entering, recession.
The drop in withholding not only broke a yearlong uptrend, but it has established a downtrend. After adjusting for wage inflation, the year-to-year comparison is now slightly negative. It means that the United States is barely hanging above recession. It will take a couple of months more before we know for sure one way or the other, depending on how strong or weak collections are.
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Officially it takes two quarters in a row of falling GDP for the NBER to call a recession. By the time that second GDP report comes out, months after the tax data has already tipped us off, the recession will have already been under way for seven to nine months. But the Fed wouldn't materially loosen policy until then.
There's no guarantee that the numbers will go negative in the short run. Consequently, we should not expect any loosening of policy until at least late 2018. That's plenty of time for tight monetary policy, euphemistically named "normalization," to cause considerable damage to stock prices.
The Fed started real tightening in October. It has begun to shrink its balance sheet. That will pull money out of the banking system. The program is starting very gradually, with only baby steps that are barely impacting the markets. But over time, it will increasingly drain money from the pool of cash available to purchase stocks and bonds. This has set up the conditions for a bearish stock market, but as I have been emphasizing, it won't necessarily trigger them immediately. As you know if you have been following along with these reports, we've been looking to January or February as the likely window for a market high.
Because the tax data is real-time hard data, it gives us an edge. Economic data is lagged and manipulated. It often takes another month, or several months, before the economic data reflects what the tax data has already shown. With the benefit of knowing what the tax data tells us about the actual state of the economy, we can move in advance of the crowd. We can more easily identify the false narrative, or at least the old narrative that is no longer true.
The strength in the tax data prior to November told us that the economy was heating up. That told us that the Fed would tighten. These cycles tend to last a few years. During that time, the Fed has difficulty because the economy defies conventional wisdom and continues to heat up as interest rates rise. Bear markets thrive in these environments. Each time the market sells off, the bottom is declared and dip buyers come in. But the ensuing rally falls short of the last one and the market rolls over again.
Early in the cycle the opportunity usually presents itself to place judicious short positions on both individual industries and the broad market. I give suggestions for those based on technical analysis in the Wall Street Examiner Pro Trader Daily Trades List.
The Chart That Shows Me We're in Recession Territory
About the Author
Financial Analyst, 50-year charting expert, finance + real estate pro, and market analyst; published and edited the Wall Street Examiner since 2000.