Courtesy of Lee Adler of the Wall Street Examiner
The downward revision of the Q1 GDP estimate from 2.4% to 1.8% is pretty silly considering that there is a real time indicator that tells us exactly where we were in Q1 and exactly where the economy is heading right now. It’s not a perfect indicator. It requires some thought and a few adjustments, but it is my favorite. It’s real time. It’s not based on subjective data. It’s not seasonally adjusted hocus pocus mumbo jumbo. It’s not a survey sample. It’s an actual total of tax collections by the US Government, updated through yesterday, that most of the time tells us EXACTLY how fast the US economy is growing, or shrinking as the case may be.
I track withholding taxes every week in my weekly reports on the Treasury market. The government publishes the data every day, along with hundreds of other line items on revenues and outlays in the Daily Treasury Statement. I have compiled the data back to 1998.
I run charts of the data because I find visuals far more illustrative than columns of numbers. Charts, if properly constructed, tell stories. They enable us to understand the economic world far better than simply reading headlines or mainstream media reports, which usually bend or miss the truth altogether.
For example, the Wall Street Journal blared, “First-Quarter GDP Growth Revised Down.” Marketwatch screamed “U.S. first-quarter GDP cut to 1.8% from 2.4%.” Reuters wrote, “U.S. first-quarter growth cut to 1.8 percent.” None of that was true of course. Bloomberg may have been closer to the truth when it posted, “Economy in U.S. Grew Less Than Projected in First Quarter.” But we really still don’t know exactly how fast the economy grew. Only the government’s guesstimate changed.
The available withholding tax data with just some sixth grade arithmetic analysis applied, may be instructive.
On the surface, it looks as though year to year real growth after adjusting for inflation is now around 11% including the effect of the tax increase went into effect in January. To estimate how much is due to the tax increases, I compared mid November data with mid February 2012. Early bonus payments and other machinations done to avoid the tax increase inflated the take in late November and through December. Then in January and early February, the counter effects of those moves showed up in the data, making them weaker than they would otherwise have been. Therefore, I compared the numbers from before and after those effects. In mid November 2012, annual growth was at approximately 1.5%. In mid February 2013 it was approximately 8.5%, suggesting that the impact of the tax increase was about 7%.
After deducting that and a ballpark 2% for compensation inflation each month, January’s net annual growth was 2%. February’s was 1.8%, and March’s was 4% for an average gain of 2.6% for the quarter. That’s probably higher than the reality because the withholding taxes may have included some capital gains related withholding in some types of financial accounts. There were monster gains in stock prices between Q1 2013 and last year. Tax bracket creep may also have had a minor impact. On the other hand, maybe the BEA’s first guesstimates of +2.4% were closer to the mark than the latest guess of +1.8%. The annual and 5 year benchmark revisions are still to come.
Just for your information, applying the same exercise to the second quarter, April was +0.75%, May +2.4%, and June to date +4%, for a quarterly average of 2.4%. There’s that number again. What the advance headline number will be for the quarter is anybody’s guess. BEA data shows that the difference between the advance number and the final number is usually from 0.5% to 2%. The margin of error is huge.
The actual number doesn’t matter to investors and traders. Only the public perception of the news headline matters, regardless of whether it’s close to reality. Today investors want to believe that the number is weak because it would mean that the Fed won’t taper QE any time soon. The headlines reinforced their want, and the market has risen in response.
Bernanke said that the tapering of QE will depend on the economy performing as forecast. The news today suggests that the economy is weaker than forecast. The idea of the taper being conditional on the economy performing as expected is problematic. The Fed’s forecasting record is horrible. If nothing else, we can expect to be whipsawed again and again as a result of the conditionality of the expected taper.
I think that the bottom line is that nobody knows what GDP growth is. I certainly don’t know. The withholding data is another way of looking at it, and it’s probably more reliable than the BEA’s estimate. It at least gives us a good idea of the economy’s direction and approximate growth in real time.
But does that matter? Trading based on economic data, especially the GDP estimate, is a bit of a circle jerk. It’s a guess at how the market will respond to the Fed responding to the data. Why do that when it’s so easy to just follow the money?
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