More Bad News On Dying US Manufacturing- Excise Taxes Drop, But Markets Have Reason To Party On
by Lee Adler, Wall Street Examiner
[While US tax collections on everything went gangbusters in April, absolutely through the roof, there was one exception, Federal excise taxes. The following, excerpted from the Wall Street Examiner Professional Edition weekly Treasury Update, looks at what happened, and what it may mean.]
As of April 30, month to date withholding tax receipts for the full month were 10.1% ahead of last year (see table below). Non withheld individual taxes were up 52%. They are material at this time because quarterly estimated individual income taxes and underpayments for 2012 are due on April 15. The enormous bulge was partly due to the rate increase that went into effect in January, but even with that, this is a spectacular increase.
Quarterly excise taxes were due at the end of the month so this is a complete number for the first quarter. This item is not relevant to April business activity. It suggests a first quarter decline in the categories of economic activity covered by excise taxes.
Excise taxes are mostly based on quantities, not prices, and they cover a broad range of items, with the majority involving fuels. IRS form 720 lists the various items covered. Gasoline taxes account for about 40-45% of the total, aviation taxes around 15%, with all the others accounting for 40-45%. The vast majority apply to manufactured goods.
This data is evidence of the ongoing decline in US manufacturing, a trend that is no secret. The US is a services and trade based economy. Manufacturing accounts for just 12% of GDP. See March Factory Order Rebound Doesn’t Change Dismal Trend.
While the decline in excise taxes confirms the decline in US manufacturing, it should not be construed to suggest a decline in overall economic activity. Withholding taxes cover every segment of the economy, and after adjusting for the tax rate increase they still suggest growth.
Corporate taxes for the first quarter were collected on April 15. They show a 26.5% gain suggesting strong profit growth.
What does all this have to do with the stock market? Economically speaking, not much. But late last year I foresaw the likelihood that tax increases would increase government revenues, that spending cuts would cut outlays, and that that would translate into reduced Treasury supply. I also forecast that those forces would be bullish when just about everyone else was wringing their hands about the likely negative effects of the fiscal cliff. As with most mainstream market pundit prognostications, their worries about the fiscal cliff were really a giant fecal cliff.
My forecast of reduced Treasury supply with its bullish effect came to fruition in April in huge pay-downs of expiring cash management bills, followed in May by sharply reduced offerings of the regular weekly bills. Just this week the Treasury announced that it would cut the offering of the 4 week bill from an expected $30 billion to just $20 billion. Until a couple of weeks ago, those offerings had been running $40-45 billion per week. As these bills roll over, that means that some holders will get cash back with no place to put it.
In that respect, reduced supply also creates an increased demand for the remaining supply of securities. This week’s reduction means an extra $10 billion will be coming back into investors’ pockets, raising the total bill pay-downs on the week to $35 billion. That cash is likely to burn a hole in the pockets of the holders. They will look for mischief to get into with that money.
Reduced supply of what Russ Winter likes to call “Ponzi units,” which essentially are any kind of securities, the riskier the better, must now absorb a flood of Fed-bucks every month plus the cash from the Treasury pay-downs that will continue to flow into dealer and other investor accounts for the next 8 weeks. With the units of supply reduced and more cash flowing in to buy them, the price of those Ponzi units rises. So far, the extra cash flows have accrued to the benefit of stocks. Treasuries also got much of the benefit until this week, but sentiment could be shifting away from them as stocks bubble higher. As long as the Fedbucks keep flowing and the government keeps reducing the amount of new Treasury supply, these trends should continue.
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