The primary data point that the perennial bulls on Wall Street claim as evidence
for an improving economy is the monthly jobs number. The Non-farm Payroll Report
claimed that 255,000 jobs were added in July on a seasonally adjusted bases.
This number was well above the 12-month average of 190,000. And according to
the Bureau of Labor Statistics (BLS), at total of 1.66 million additional people
have been employed thus far in fiscal 2016, making this the one bright spot
in the economy.
And with 1.66 million additional paychecks flooding the economy, one would
assume the U.S. Treasury was flush with new tax receipts, which would assist
in reducing the budget deficit. However, according to the Treasury Department,
the deficit came in at $112.8 billion in July, the highest since February's
$192.6 billion. For the first ten months of the fiscal year, which ends Oct.
1, the budget deficit was $513.7 billion, up from $465.5 billion a year earlier.
Obviously, the government runs a deficit when it spends more than it collects
in taxes and other revenue, as is almost always the case. But this year the
Congressional Budget Office (CBO) is predicting the 2016 deficit will total
$590 billion, up more than 34% from last year's budget shortfall. Most importantly,
this growing gap comes primarily because of lower-than-expected receipts to
the Treasury.
A closer look at tax receipts over the past few years reveals that the growing
number of employed has not had the effect on cash flows to the Treasury that
you would expect. Receipts from the Federal Unemployment Tax Act (FUTA) have
been falling steadily since 2012, according to the Office of Management and
Budget, moving counter to the growing number of people employed. The FUTA tax
is levied at 6% on the first $7,000 of an employee's wage.
In 2012 receipts totaled $66.6 billion, in 2013 those receipts fell to $56.8b,
in 2014 they were down to $54.9b, and in 2015 they dropped to $51.8b.
The decrease in the FUTA rate in July of 2011 from 6.2%, to 6.0% may explain
some of the shortfalls, but FUTA has continued its decline since 2012 despite
the steady rise in employed persons.
In the past fiscal year of 2015, FUTA also fell short of the US Treasury's
own estimate of $56.35 billion coming in at just $51.8 billion, creating an
8% shortfall.
In the fiscal year 2015, Social insurance and retirement receipts also came
up short at $1,065.3 billion, $5.1 billion lower than the Mid-Session Review
estimate.
This begs the salient question: If the employment condition is booming why
are payroll taxes falling?
There are a couple of answers to that question and neither is favorable. The
BLS numbers are either wrong or the quality of new jobs created must be very
poor. The latter response seems the most credible; a combination of an increase
in the proportion of part-time workers and full-time jobs that provide lower
compensation. This would also explain the economy's falling rate of productivity.
After all, it's hard to increase the output per hour of barmaids and waiters.
The true employment condition, as well as the quality of those jobs, can be
found in the tax receipt story, which is more comprehensive than the BLS's
estimate. But it's not just payroll taxes that have declined; corporate tax
receipts have fallen 12.8% year-to-date, while individual taxes are down 0.4%.
Again, the only consistent outlier amongst all of the weak data is the monthly
Non-Farm Payroll Report. But if the quality of those net new jobs created is
extremely poor, then the headline BLS number can be easily reconciled with
the economic data points that point towards recession.
The bottom line is that our standard of living cannot be improving when Productivity
has been negative for 3 quarters in a row. The economy isn't getting better
while earnings on S&P 500 companies have been negative 5 quarters in a
row, and are projected to come in negative for the 6th time. There can be no
real growth when tax policy remains unchanged and receipts are falling. And
finally, it's hard to be upbeat regarding growth when nominal GDP is up just
2.4% year-over-year. The government's own measurement claims Core Consumer
Inflation is up 2.2% YoY. This means real economic growth is just 0.2%. But
even that paltry growth rate quickly vanishes if you believe inflation is higher
than what the Bureau of Labor Statistics reports.
The truth is the economy is most likely already in a recession and there never
was a viable economic recovery. Just an anemic, ersatz and transitory bounce
in GDP derived from artificial, record-low interest rates and asset bubbles.
Investors need to keep their eyes open as equity prices march further into
all-time high territory. And, most importantly, have a strategy to protect
their portfolios once sanity returns to the market.
