Weekly Indicators: a deepening quandary about the payroll tax edition

- by New Deal democrat

Monthly data released last week included a paltry nominal increase in retail sales, an actual slight decrease in industrial production (but with prior months revised substantially higher), and a surprising increase in consumer confidence. There was a surprise surplus in the Treasury budget in January.

This week continued to give some indications that tax increases may be affecting the economy. So Let's start this look at the high frequency weekly indicators by checking what is happening with tax withholding:

Employment metrics
Daily Treasury Statement tax withholding

• $80.9 B unadjusted was withheld this year in the first 10 days of February compared with $75.1 B a year ago, a 7.7% increase


•  $130.0 B (adjusted -13.1% for 2013 payroll tax withholding changes) vs. $143.2 B, -6.2% YoY last 20 days. The unadjusted result was $149.6 B for a 4.5% increase.

Initial jobless claims

•   341,000 down 25,000


•   4 week average 352,500 up 2,000

American Staffing Association Index

• unchanged at 89 w/w up 3.5% YoY

Employment metrics were contradictory this week. Initial claims appears finally to have established a new lower range of between 330,000 to 375,000. The ASA is running even with 2007, and slightly ahead of last year, although the absolute index was higher.

Let me repeat my comment on tax withholding from last week: I am adjusting my YoY tax withholding figures to reflect the increase in personal withholding taxes. While the YoY collections are up substantially, they should be up over 15% to compensate for the tax increase. Since I can think of no reason why employment itself should have fallen off a cliff in January, it is very possible that there is a lag in the payment of withholding taxes with the new increase. If this hypothesis is correct, I would expect tax withholding to be much more reliable by the end of February. So far, that isn't happening.

Consumer spending

• ICSC -2.5 w/w +2.1% YoY


• Johnson Redbook +2.4% YoY


• Gallup daily consumer spending 14 day average at $86 up $26 YoY !

Gallup has been outrageously positive for nearly 3 months. The ICSC varied between +1.5% and +4.5% YoY in 2012. This week was again close to the bottom end of that range. Johnson Redbook is also in the lower part of its YoY growth range from 2012. Even in the worst case, it still looks like consumer spending has not collapsed due to the tax withholding increase. It's worth noting that WalMart is not included in either ICSC or Johnson Redbook.

Housing metrics

Housing prices

• YoY this week. +3.1%

Housing prices bottomed at the end of November 2011 on Housing Tracker, and have averaged an increase of +2.0% to +2.5% YoY for the last year. This week was the best YoY comparison in about 7 years.

Real estate loans, from the FRB H8 report:

• -0.1% w.w


•  +0.7% YoY


• +2.8% from its bottom

Loans turned up at the end of 2011 and averaged about 1% gains YoY through most of 2012, and have recently shown somewhat more YoY strength. This week was close to the bottom of its recent YoY range.

Mortgage applications

• -10% w/w purchase applications


• +15% YoY purchase applications


• -6% w/w refinance applications

Purchase applications had been going sideways for 2 years,, but in recent weeks may have finally broken out of that range to the upside, but the move is not decisive yet. Refinancing applications were very high for most of last year with record low mortgage rates, but these have recently increased.

Interest rates and credit spreads

• +0.01% to 4.86% BAA corporate bonds


• -0.02% to 2.00% 10 year treasury bonds


• +0.03% change at 2.86% credit spread between corporates and treasuries

Interest rates for corporate bonds have generally been falling since being just above 6% two years ago in January 2011, hitting a low of 4.46% in November 2012. Treasuries have fallen from about 2% in late 2011 to a low of 1.47% in July 2012. Spreads have varied between a high over 3.4% in June 2011 to a low under 2.75% in October 2012. The last few weeks have seen a marked increase in rates, although the YoY changes remain positive.

Money supply

M1

• +0.5% w/w


• +2.3%% m/m


• +10.8% YoY Real M1

M2

• +0.1% w/w


• +0.1% m/m


• +5.4% YoY Real M2

Real M1 made a YoY high of about 20% in January 2012 and has generally been easing off since. This week's YoY reading remained above a new low set several weeks ago. Real M2 also made a YoY high of about 10.5% in January 2012. Its subsequent low was 4.5% in August 2012. It was weak once again this week. Both are still quite positive in absolute terms.

Oil prices and usage

•  Oil $95.86 up $0.14 w/w


•   gas $3.61 up $.07 w/w


• Usage 4 week average YoY +4.4%

Gas prices are increasing seasonally. Unusually for the last year plus, the 4 week average for the third week in a row was positive YoY. This may be due to winter weather being, well, actually winter-like this year.

Transport

Railroad transport

•  -6400 or -2.3% carloads YoY


• +4100 or +2.6% carloads ex-coal


• +10,500 or +7.7% intermodal units


• +11,400 or +2.2% YoY total loads


• The AAR changed its carload categories this week, so no week over week diffusion index is possible. It should be able to be resumed next week comparing the new categories.

Shipping transport

• Harpex up 4 at 370


• Baltic Dry Index up 5 to 753

Rail transport had been whipsawing between very positive and very negative readings over the last 2 months. This may well be the aftermath of the dock strikes. Traffic ex-coal has now returned to being positive for the second week in a row. The Harpex index is gradually improving off its 3 year low of 352, and the Baltic Dry Index is also slowly improving from its recent low.

Bank lending rates

• 0.195 TED spread down -0.030 w/w


• 0.2000 LIBOR unchanged w/w

The TED spread made a new 18 month low. LIBOR remained at its new 52 week low and is close to a 3 year low.

JoC ECRI Commodity prices

• up 0.12 to 129.03 w/w


• +3.22% YoY

There are a few inescapable "blind spots" in these high-frequency indicators. There is no weekly gauge of manufacturing, nor of trucking, for example. It's fair to say that the weekly consumer sales information is very much different from the email leaked from WalMart yesterday. WalMart dropped out of the ICSC measure several years ago, and as it dominates low end retail, both the ICSC and Johnson Redbook may have a bias towards mid to higher end retail sales. On the other hand, Gallup's self-reporting by consumers should be unaffected.

It remains the case that the most important issue at the moment is whether the 2% increase in withholding tax rates is having an effect on consumers. The impending austerity of the budget sequestration is an additional negative, and it looks very likely at this point. The potential consequences of moving income and spending forward into 2012 from 2013 due to tax increases are also noteworthy. For the last three weeks it looks like we got some - but by no means an overwhelming amount of - evidence that there has been an effect.

By far the most negative data was tax withholdings. Temporary jobs aren't negative, but they are flat. M2 money supply has declined since the first of the year. Corporate bond rates are rising and the credit spread is widening, although it is still closer to YoY lows.

Continuing positives once again include the housing market, consumer spending especially as measured by Gallup, bank lending rates, and commodity prices. Gas prices, while rising, haven't turned constrictive yet. Gas usage has turned positive. Rail traffic is also positive again. Jobless claims appear to have established a new, lower range.

As I said last week, while there is some evidence of a consumer and employment slowdown, the majority of the high frequency data continues to support economic expansion.

Have a nice weekend.