by Lee Adler, Wall Street Examiner
Let’s get one thing straight. I am no economist. If I were, I’d be too embarrassed to tell anybody anyway. I’m just a guy who learned from Yogi Berra that, “You can observe a lot by watching.”
I do like to watch, but not financial “news” TV. It’s a waste of time and counterproductive, especially CNBC infomercial TV. I became fearful that if I watched too much of that stuff I would grow hair on my palms and drool green sputum. So I turned off the TV 10 years ago. I do admit to listening to Bloomberg radio from time to time, however.
The thing I like to watch is data. It sounds boring, but it just depends on how you look at it. I like the raw, unedited material, suitable for mature audiences only. None of that seasonally adjusted cartoon stuff, no sir! I like the hard stuff. The rawer and fresher the better. The sharper and more jagged the edges, the more it excites me.
To make matters worse, horror of horrors, I like to compare streams of raw unedited data from entirely different and completely unrelated things, like say, the Fed’s balance sheet, the stock market and the economy. All on one chart! Such dirty stuff. I make sure the door is locked and the shades are drawn. But somebody has to do it, and I appointed myself. Yes, it’s a perversion. But I just can’t help it. I look at these twisted lines for hours on end. And I see stuff.
One data series really excites me because it comes out daily and it relates to the real economy. It shows how much the government is collecting every day in withholding taxes. That’s right! Every freaking day the government reports how much it takes in in withholding and other taxes. It also tells how much it spends by category, daily.
Now, who else has told you that? CNBC? No. Bloomberg? No. Dow Jones? Pfffft. Of course not! How about Reuters? They’re upstanding people in the community. But no, no reports there either. In fact, no mainstream media types, and to my knowledge, no major brokerage firms or banks report this data. They have it. The US Department of the Treasury publishes it every day, but the only person in the Wall Street mainstream whom I’ve seen discuss it is Barry Ritholtz. He gets it from Matt Trivosonno who’s the only other person I know of who has been covering it. That’s a pretty small universe of coverage for something so important.
Not only that, but it’s clear that even if Wall Street’s economic talking heads know it exists, and have it, they pay no attention to it whatsoever. There’s just no other way to explain how the Street punditocracy could so consistently underestimate the strength of the economy for most of the past 6 months. It seems like every week the economists’ are too pessimistic. Economics is alchemy and economists are charlatans, quacks, frauds, and shills, but still, you would think that they could get lucky and get it right once in a while. Had they been paying attention to this readily available data, there’s almost no way they could have gotten it wrong. But they did and they’ve continued to.
I look at this data on a daily chart with a couple of moving averages to quiet things down because the data is so choppy. It’s choppy, but it’s not noise. The patterns are repetitive and follow a highly esoteric and inexplicable rhythm which you have probably never experienced. These patterns have the technical name “pay periods” and they occur either once a week, every two weeks, twice a month, or once a month. I know it’s technical, but stay with me here. It means that collections are higher on Fridays than on Mondays! They are higher on the 15th and 30th or 31st of the month, than other days. Do you realize how how much research was involved in discovering this?
Aha! I didn’t think so.
So yes, the data is choppy, but it follows regular patterns, and if you line up this year against last year and smooth out the peaks and troughs with just a little moving average smoothing it’s not that difficult to get a reasonably clear picture of the trend. Of course, horror of horrors, 365 isn’t evenly divisible by 7, the number of days in a week, so that means that every so often it’s necessary to time shift the data a wee bit. Is that so tough? Trust me. It isn’t.
Given that background here’s what the data looks like as of now. I start with a two week moving average, based on what I recall as a typical “pay period” from my working days. As of Friday, March 22, this year was 10.6% higher than last year. I then smoothed those series to a one month moving average. As of Friday that line was 11% above last year. Very impressive gains, I must say.
Of course some of that is due to the increased tax rates that went into effect on January 1. Rather than bore myself with an analysis and discussion of the accounting on that, I thought that a little before and after picture would work. There was some fiscal cliff beat the clock tax stuff going on in December, which was offset in late January, so I looked at November 15 as the before and February 15 as the after. There was a jump of 6.5% between those two dates. Given the little that I know about the tax rate changes, and doing the arithmetic in my head, that seemed about right.
If we assume that 6.5% is the amount of the gain attributable to the tax increase and deduct it from the current 11% margin over last year’s March 22 collections, it suggests that the remaining 4.5% is due to a combination of wage and salary inflation and economic expansion.
Getting a handle on inflation when it comes to wages and salaries is a little tricky. I like to use the BLS data on average weekly employee compensation because it’s the most current data. It rose 2.1% in February. That’s fairly close to the 12 month average rate of increase. So if inflation accounted for 2.1% of the increase in total taxes withheld, that would mean that economic expansion would account for the difference of 4.5% minus 2.1%, which equals 2.4%.
So there it is. The economy is growing at 2.4%. The devil is in that wage and salary inflation figure though. Allowing for a little fudge one way or the other, the economy could be growing at 2% or closer to 3%. Estimates below that range would seem too pessimistic. And nobody’s higher than that range. Virtually no one that I’ve heard of is irrationally exuberant about the economy, although that in itself is probably an indication that we’re headed that way. Those people do have a tendency to be wrong about everything, and when they’re all too low with their guesses, it suggests that in reality things are getting hotter than they think.
Here’s what the difference between this year’s withholding and last year’s looks like as adjusted for inflation. You can clearly see where the 4 week moving average jumped from around +5% in December to over 11% in January from the tax increase. After some payback in early February for the fiscal cliff tax increase front running that took place in December, the numbers have bounced back and remained pretty stable near 9-10% since late February.
It’s funny that economists try to guess these numbers to within a tenth of a percent. The media pushes them with surveys on every economic data series under the sun. It’s a little arrogant, and mostly just crazy to pretend that anyone could guess these numbers to that degree with any regularity. Crazier still is that we pay attention to all the silliness and try to trade it.
This post is adapted from the weekly Wall Street Examiner Professional Edition Treasury Update, available to try for 30 days, risk free.
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