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February 2019 Budget Commentary

Monthly Budget Review

 February 2019

 Budget Totals for Fiscal Year 2019 through January will not be published by the Congressional Budget Office this month due to the recent government shutdown.

 Economic statistics are a totem of our age, presented as if a God’s-eye view of output and employment were possible.  The reality is that precisely quantifying the value of all manufactured goods and services or identifying how many Americans are currently employed and how much they are paid takes a great deal of time and requires a myriad of data collection, assumptions, estimates, and checking to determine the final tallies.  These results are presented well after the date they supposedly reflect, by which time conditions may have changed considerably.

Our purpose here is not to quarrel with conventional economic statistics, but rather to suggest a simpler approach.  The US government’s Daily Treasury Report records the spending and income of the federal government each working day.  As such, it offers a real-time insight into the health of the economy (assuming, of course, that these reports are accurate.)  Tax receipts in particular can provide useful data on the state of the job market.  In essence, the government provides a running tally of the withheld taxes it has received—and since most of these taxes are deducted from paychecks, the trend can give us a good view of the state of the job market—more workers and higher earnings produce more withheld taxes, all other things being equal.

Withholding data for January, then, presents quite a disconcerting picture–receipts collapsed (down 11%) on a year-over-year basis.  I can think of three arguments– other than the obvious conclusion that the economy went south– as to why, none of which seems convincing in isolation. 

  • Tax law changes. It is true that all other things being equal withholding taxes would have fallen due to the tax law changes of 2018—however, this has been going on for a year now without showing up to this degree.           
  • The government shutdown. This is plausible for a small amount of the decline, but 800,000 jobs out of 150 million shouldn’t have this kind of effect.  Also, the IRS doesn’t need to process forms to accept the money, so while refunds were slowed, withhold deposits should not have been. 
  • Calendar effects. 2019 did have an extra Monday (the best day of the week for withholding receipts) but this does not account for a large portion of the decline. 

It is possible that all three of these reasons combined to produce a stinker of a month.  We will be watching February (which as of this writing should not be subject to any of these excuses) to see if the trend continues. 

In the meantime, corporate tax receipts continue to tumble, a trend which began even before the reduction in the top rates last year.  There is no sign of the much-promised repatriation of “overseas” profits which were supposed to generate more revenue for the Treasury as well as investment in this country.

All of which adds up to a big question:  is the economy really as strong as most economic commentators and assorted politicians say it is? 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  

Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Doylestown Wealth Management, Inc. are separate entities from LPL Financial.