Withheld taxes indicate personal income is taking a turn for the worse

The amount of withheld taxes received by the Department of the Treasury for a 12 month period ending October 31, 2008 was 0.65% higher than a year ago after being adjusted for inflation. This is down from September's rate of 1.43%. This is significantly lower than the rate in 2006 and 2007 where 12 month's withheld taxes grew on average by 4.5% a year.

Withheld taxes gives us a day to day glimpse of how personal income is faring well in advance of the official numbers.  So far, withheld taxes in this current downturn is resembling the slowdown during the 2001 recession. Withheld taxes is still currently growing. If the downturn continues, there could be a long ways to go before reaching the bottom. Especially if this turns out to be a stronger recession than the one in 2001.

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Withheld taxes post weak growth; further slide is likely

The amount of withheld taxes received by the Department of the Treasury for a 12 month period ending September 30, 2008 was 1.41% higher than a year ago after being adjusted for inflation. This is up from August's rate of 0.76%. This is significantly lower than the rate in 2006 and 2007 where 12 month's withheld taxes grew on average by 4.5% a year.

So far, withheld taxes in this current downturn is resembling the slowdown during the 2001 recession.  Withheld taxes is still currently growing.  If the downturn continues, there could be a long ways to go before reaching the bottom.  Especially if this turns out to be a stronger recession than the one in 2001.

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Growth in withheld taxes is slowing down dramatically

The amount of withheld taxes received by the Department of the Treasury for a 12 month period ending August 29, 2008 was 0.73% higher than a year ago after being adjusted for inflation. This is down from July's rate of 1.66%.  This is a dramatic decline from 2006 and 2007 where 12 month's withheld taxes grew on average by 4.5% a year. 

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Growth in Withheld Taxes slows in July

The amount of withheld taxes received by the Department of the Treasury for a 12 month period ending July 31, 2008 was 1.71% higher than a year ago after being adjusted for inflation. This is down from June's rate of 2.27%.

Through the last cycle, the year over year growth rate of withheld taxes closely mirrored the stock market. The real growth rate turned negative just as the recession ended. It wasn't until the end of 2002 and the beginning of 2003 that the growth rate bottomed and started to improve. The stock market also started growing at the same time. Currently real withheld taxes is growing year over year, but the trend is downward.

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Withheld Taxes show income still growing but at a slow rate.

The amount of withheld taxes received by the Department of the Treasury for a 12 month period ending June 2008 was 2.39% higher than a year ago after being adjusted for inflation. This is up slightly from May's rate of 2.20%. Through the last cycle, the year over year growth rate of withheld taxes closely mirrored the stock market. The real growth rate turned negative just as the recession ended. It wasn't until the end of 2002 and the beginning of 2003 that the growth rate bottomed and started to improve. The stock market also started growing at the same time. Currently real withheld taxes is growing year over year, but the trend is downward.

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Withheld Taxes Show Income is Declining

The amount of withheld taxes received by the Department of the Treasury for the last 12 months through May 2008 was 2.27% higher than a year ago after being adjusted for inflation. 12 month's withheld taxes ending in May 2008 is now off 0.63% from the peak reached in December 2007.

While withheld taxes are declining slightly, they have not reached the magnitude that occurred during the 2001 recession when withheld taxes declined over 5% year over year. Withheld taxes gives us a real time peak at what is happening to income. It is consistent with the recent spate of economic data suggesting that we are flirting with recession but are not feeling the effects of a full-blown recession.

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Withheld taxes show that personal income is still declining

Withheld taxes show that personal income is still declining. One year's withheld taxes through April declined 0.21% from March after being adjusted for inflation. Withheld taxes peaked in December 2007 and have declined 0.91% since then. Before adjustments for inflation, Withheld taxes has grown 2.31% for the first four months of the year compared to a year ago. Core CPI has averaged 2.37%. This is also not accounting for growth on a per capita basis. The U.S. has averaged 1.01% population growth over the last 10 years. Real growth less than 1% would still be negative on a per capita basis.

Withheld taxes gives a real time peak at income. Income is declining consistent with the manner it declined at the beginning of the last recession.

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Withheld Taxes Stablizes in March

Last week I discussed Withheld Taxes and Matt Trivisonno’s real time daily charts. Marketwatch has an article on TrimTabs, an investment research firm, and their analysis of Withheld Taxes.

Let's start with the bad news: Not only is the economy in a recession, according to TrimTabs, it has been in one for six months now. The only reason that this isn't more widely recognized is that it takes months, if not years, for the government to officially confirm that a recession has started.

Now the good economic news from TrimTabs: There is a distinct possibility that the economy has already emerged from the recession, or is about to. TrimTabs bases this relatively cheerful assessment on an analysis of daily income tax withholdings from the U.S. Treasury. According to Madeline Schnapp, director of macroeconomic research at TrimTabs, withholdings during March were 4.1% higher than one year ago.

Adjusted for inflation, 12 months taxes withheld through March 2008 was virtually unchanged declining 0.026% from February 2008; year over year 12 months taxes withheld is up 3.41% adjusted for inflation. After dropping sharply in January 2008, taxes withheld has stabilized in the last two months. However, there have been similar rebounds before when the overall trend was down during the last recession.

Although my chart for taxes withheld only goes back to 1999, it is possible to get an idea of what it looked like by looking at income taxes filed with the IRS. Income usually declines significantly during recessions (just like it did during the 2001 recession). The current decline has been very small so far.

This current possible recession is being led by the housing and credit crisis. All the housing indicators are still getting worse: mortgage delinquencies and foreclosures (are still accelerating), housing prices (going down at a faster pace), housing demand (sales are still dropping fast), credit crisis hasn’t been resolved (lending is tight and large writeoffs are ongoing). I believe it is premature to call the end of a recession. Furthermore, I think it is still premature to say one has definitively started.

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Withheld Income and Employment Taxes: A Real Time Insight into Income

The Department of the Treasury reports daily the amount of Withheld Income and Employment Taxes. This gives us insight into income in real time. Matt Trivisonno updates the data daily on his blog. Here is his post discussing the info. Here is his daily chart.

I was able to compile complete monthly data going back to 1998. The chart on the right shows the amount of the Withheld Taxes for the past 12 months updated on a monthly basis starting January 1999 (January 1999 reflects data from February 1998 through January 1999). Withheld Taxes rose at a fast pace from 1998 and started to slow at the end of 2000. The S&P 500 started to decline around the same time that income growth started to decline. Withheld Taxes didn’t start to rise until mid 2004 well past the official end of the 2001 recession. However the rapid decline started to slow at the end of 2002. The S&P 500 bottomed out around the same time. Withheld Taxes is once again declining. Incomes tend to decline during recessions.

This second chart is a monthly version of Matt Trivisonno’s daily chart. It shows the year over year change of the Withheld Taxes for the past 12 months updated on a monthly basis. This shows how the S&P 500 is forward looking. When Withheld Taxes are starting to slow the S&P 500 declines even before the growth rate goes negative. Conversely the stock market rebounds as the decline rate starts to improve even before it turns positive.

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