It has been 4 weeks since the government shutdown ended, not enough time for any official economic data on the post shutdown period.
But we have data. Boy do we have data! It’s the daily tax collections data. And what it is showing is simply amazing. Post shutdown withholding tax collections have gone through the roof.
It calls into question the entire narrative of a softening US economy that was the basis for the Fed’s panic reversal.
The implications are horrifying so let’s take a look.
Total withholding tax collections are available to us virtually in real time in the US Treasury’s Daily Treasury Statements, released with just a one day lag. That makes them an outstanding real time indicator of the US economy.
Why then does the Wall Street captured media not report them? Good question. But who cares! I’ve tracked them for 15 years. I report them a couple times a month to the readers of my Liquidity Trader service. It’s a critical piece of data that helps us to cut through the Wall Street spin to understand what’s really going on with the US economy and the markets.
There are a couple reasons why this data can be extremely helpful to us. First, it’s not manipulated by any government statistical agency, so it’s an unbiased measure of the US economy. Second, it’s real time. It tells us what the economy has been doing right up through the last couple of months. We can see directional changes in real time. That means we have an idea what the official economic data will look like weeks before it is published.
That means that we will know whether the current market “narrative” is based on fact or fiction. The “narrative” is the consensus fairy tale that the media tells us is what investors believe is driving the market. Sometimes it’s fine to be invested in the direction that the “narrative” supports, and sometimes it isn’t. The tax data shows us how to differentiate between whether a trend is driven by fact or fantasy.
So are we going up on the basis of fact or fiction. The answer right now is not absolutely clear, but there’s certainly evidence that the market’s reason for hopium is based on fiction.
Withholding tax collections data is extremely volatile day to day so I smooth the daily data just a bit, and then compare the current smoothed data with the same period in the prior year. We can tell by looking at a chart what the trend is. Since it’s an annual rate of change, if the number is positive and rising, that means that the economy is bullish and gaining momentum.
And wow, is it positive and rising, right now!
Withholding tax collections crashed in January, thanks to the government shutdown (GSD). So it’s no surprise that some January economic data was a tad on the weak side. Was an advance look at those numbers among the things that spooked the Fed? If it was, boy, what a huge mistake. Because look what happened once the shutdown ended.
To be fair, employers started adjusting withholding rates under the new tax law in mid February 2019, so that depressant is increasingly no longer a factor. But still, the surge in the graph is amazing.
As of February 21, 2019, monthly withholding collections soared 8.3% year to year on our smoothed and slightly lagged basis. Of course, that won’t stick. It’s largely a bungee rebound from the back pay received by government workers who were temporarily furloughed. It will be a few more weeks before these numbers settle down.
But it certainly implies that the Fed made an earthshaking change in policy and tools based on a false impression that the US economy was slowing. If this data stabilizes in positive territory over the next couple of weeks, the Fed may have just sent the market on a misdirection play that will fail in spectacular fashion.
This surge in collections appeared to peak right around the BLS nonfarm payrolls survey date of February 12. It’s always hazardous to think that the BLS initial seasonally adjusted number will accidently reflect reality, but sooner or later, the jobs data will follow the tax data trend. A tightening job market would certainly be cause for the Fed to have serious second thoughts about its U-Turn toward potentially easing policy.
This is just one of the many data series I track for you in following the Fed, the US Treasury, the Primary Dealers, foreign central banks, and the US and European banking systems as they create, use, and abuse the primary sources of the money that drives the market.
The finance and economics crowd has always called the money floating around the securities markets, “liquidity.” It’s just money, but when it comes to stocks and bonds, and precious metals, “liquidity” rules. So I created a new brand to better describe my proprietary services. They’re collectively called Lee Adler’s Liquidity Trader. In those reports, I follow the money for you, so that you can know where that money is pushing the markets, not just stocks, but bonds, interest rates, and precious metals.
I say, “Follow the money, find the profits!”
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