Tuesday, November 22, 2022

More on deteriorating tax withholding receipts and jobs reports


 - by New Deal democrat

I have a new post up at Seeking Alpha, in which I lay out all of the short leading indicators, and conclude that the conditions have now been met for a recession to begin at any point in the next 6 months.

There’s one graph I intended to use which didn’t make it through to the final published piece. Here it is:

Typically recessions have only begun when 8 of the 10 components of the Index of Leading Indicators are down compared with their levels 6 months previously. And so, I go through the list . . . .

In the piece, I note that the strong jobs reports have been the biggest reason why no recession has occurred yet. But in the past several weeks I’ve been pounding the table about the implications of the steep deceleration in tax withholding receipts since mid-year. Here’s the YoY% change in total tax withholding receipts since then:

July +7.8%*
Aug +10.2%
Sep +1.2%*
Oct +12.2%
Nov +3.7% (to date)*

*= less than YoY% change in CPI

I’ll get back to this chart further below.

In the meantime, consider that the monthly household report is prepared from a sample of 50,000. The monthly establishment report is prepared from a sample over 100,000+. But tax withholding is a full and complete report of what every taxpayer/employer in the US remits daily to the Department of the Treasury.

As a result, total tax withholding receipts should come fairly close to mirroring aggregate payrolls, especially for non-supervisory workers, in the household jobs report. The one important difference is that even bosses pay withholding taxes, up to $147,000 of salary, on Social Security, and also on Medicare without any income limit. With that in mind, here is a graph of the YoY% change in aggregate payrolls for both non-supervisory workers and all workers for the past year:

Note that beginning in April, the YoY trend starts to decelerate markedly.

Back in August, Investors Business Daily highlighted the below graph of the monthly 10 week YoY% change in tax withholding to date:

Note that, just like aggregate payrolls, with a one month delay it peaked and had declined ever since.

IBD hasn’t updated since, but the values are easy enough to calculate. As of the end of September, the 10 week YoY% change was 4.2%. As of the last daily report last week, the increase was only 3.7%.  

Note that beginning in July in the IBD graph, and the updated information for the 10 week totals, and the monthly totals from July and September in the monthly chart above, *all* of the YoY% increases in tax withholding are less than the rate of inflation.

In other words, since July *even in the aggregate* non-supervisory workers at least are making less, adjusted for inflation, than they were at the same time in 2021.

Further, per my rule of thumb for non-seasonally adjusted YoY data, when the YoY% change declines by more than half, which in the IBD metric it did by September, the data has likely made its absolute peak and started to turn down in absolute terms (i.e., if we could seasonally adjust it).

Over the weekend I took a look at how tax withholding performed in the year leading up to and during the 2001, 2008, and 2020 recessions. In each case, I found that when tax withholding declined on a YoY% basis to a level of 1% or less above CPI, that coincided with a variance of one month with either weak jobs reports of less than 100,000 jobs gains, or even outright job losses, in either the household or establishment aspects of the jobs report.

Now here are the m/m gains/losses in the household and establishment jobs reports for the last 12 months:

What tax withholding data is strongly suggesting is that the actual job losses in the household reports in June and October were signal, not noise, and that there is a strong likelihood that the establishment numbers are going to be revised downward in the future as more complete data is updated.