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Federal tax collections data gives us a leg up on the market because it tells us what to expect when the lagging economic data indicators are released later. That puts us ahead of the crowd, which is waiting for biased Wall Street pundits to interpret already stale, manipulated data when it's finally released. Meanwhile we already know what the facts are.
Tax data has told us whether the lagging economic indicators are promoting a false narrative. Thanks to statistically massaged data and deliberate or unknowing misinterpretation by the talking heads, that can go on for months. But we know the facts.
More importantly perhaps, the tax data has told us what the Fed will be seeing when it gets the lagging economic data. That helped us to know whether incoming economic data will keep the Fed on track or not.
Now, however, the picture has gotten fuzzy. The big tax cuts enacted into law at the end of 2017 have begun to impact tax collections. That makes it virtually impossible to analyze year-to-year changes on a like-versus-like basis. It will be several months, and perhaps the whole year, before we can make these year-to-year comparisons in a way that reflects the actual trend of the U.S. economy.
In other words, Trump's tax cuts are hiding the "big picture" right now when it comes to market predictions.
But fortunately, there's another "bonus" indicator that tells us what's going on…
Total Federal Revenue Indicates a Coming Market Downturn
Here's what we do know right now. Total tax collections in January were up despite the tax cut. From that we can deduce the U.S. economy was going gangbusters, at least in the upper echelons of the U.S. income strata. This will only encourage the Fed to continue to tighten, regardless of how far stocks fall over the intermediate term.
Initial data on monthly tax collections comes via the end-of-month Daily Treasury Statement, available to us one day after month end. This is unmanipulated, hard data that can give us a clear, real-time understanding of the direction of the U.S. economy weeks before the lagging economic data is reported. We merely need to compare year-to-year growth rates by month to see whether the trend is slowing, heating up, or stable.
A few days later, the Monthly Treasury Statement provides us with a little more detail on several important categories of data. This statement is issued eight business days after the close of the month. It is useful because it breaks out Social Security taxes from total income tax collections and provides a breakdown on different types of excise tax collections. This is very helpful in understanding both employment trends, transportation trends, and trends in various sin taxes, which are always an interesting item for understanding personal spending trends.
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But thanks to the massive tax cuts enacted at the end of 2017, we're now handicapped in understanding the year-to-year differences until next January. The comparisons are no longer like to like, and the tax law changes are so arcane, it is virtually impossible to make accurate adjustments to account for the different tax rates.
Even though year-to-year comparisons will not be valid until next January, when the tax law will have been in effect for 12 months, there is still a good reason to watch the data closely. We can still track how total federal revenue is impacted. That's critical information because it directly impacts the amount of Treasury supply that the U.S. government will bring to market. The greater the supply, the greater the downward pressure on bond prices, and secondarily on stocks as well.
And the TBAC has just told us that Treasury supply for the first half of 2018 will be gargantuan. Then over the past week, we saw the first actual impact as the Treasury brought $186 billion in net new supply to the market for settlement by the end of the month. We haven't seen a deluge of supply like this since the TARP financial bailouts in 2008. And we know what happened then.
A Booming Economy Ensures the Fed Will Continue to Tighten
In December I said that "the data told us that the U.S. economy top-line growth numbers should remain positive, as those in the upper income strata continue to skew the numbers toward the plus side. Meanwhile, the evidence shows that the bulk of the American people are barely treading water. While top-line growth will keep the Fed on track for tightening, ultimately the long-term health of the U.S. economy and U.S. business profits will depend on broader participation.
"In the shorter run, a tightening Fed will soon result in the end of this rally, and the beginning of a bear market later this year. There's nothing in this data that would deter that."
We now know that tax collections were also up in January, despite the tax cuts. A calendar anomaly boosted that, but even without that, collections still were up. Employers had apparently yet to implement the changes in withholding tax tables in employee paychecks. That's coming. The bottom line is that the U.S. economy was still booming in January, and that will keep the Fed on track.
Monthly Treasury Statement
This table shows net total revenue by month. Gross collections are more representative of the current period than are the net collections because net collections include refunds due based on earlier periods.
The annual growth rate has been booming since October. January continued the trend, picking up after a softer December.
The monthly Treasury Statement shows the final reconciliation of the government's revenue and outlays for the preceding month. The monthly statement involves only minor adjustments to the information already published in the Daily Treasury Statement at month end. It also includes additional detail on excise taxes and Social Security and Medicare taxes, which are not broken out in the Daily Treasury Statements.
Tax Receipts and Outlays, the Federal Deficit
Here's what is spectacular. January gross withholding taxes jumped. Before we get too excited, part of the increase was because January this year had an extra filing day versus January 2017. Even accounting for that, withholding still rose on an adjusted basis. Employers have not yet implemented the lower tax rate tables in their employee paychecks. That's coming. And there may even be some giveback that could depress revenue even more in the next couple of months.
In any case, there's no sign of economic weakness. There's nothing that would deter the Fed from continuing to tighten.
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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.