Tuesday, August 26, 2008

Tax receipts: Financial distress has not killed the US economy

The US economy is trudging around in the mud, where its primary drags are the housing and labor markets. Housing wealth is plummeting with the 16% drop in prices (new report to come out today). The labor market has shed 463,000 jobs since December. Both sectors signal a recession if other indicators like consumption, personal income, GDP, and industrial production follow… and that is a big if.

Another way to look at the health of the US economy is through US government tax receipts (federal and state, local). Individual and corporate tax receipts, where individual tax receipts were 6-times the size of corporate taxes receipts in July, are a neat coincident indicator of the state of the US economy.

The bottom line: Corporate tax receipts paint a much dimmer picture of the US economy than do individual tax receipts.

Corporate tax receipts have been falling on an annual basis since July 2007. This correlates perfectly with the timing of the sub-prime mortgage crisis that led to widespread capital losses in the global financial system. With the financial industry holding 33% of total profits in 2007 (as measured by the BEA), financials are likely the biggest drag on corporate profit tax receipts.

With one sector dragging down corporate profits, are individual tax receipts following? Individual taxes reeipts fell on an annual basis for just 3 non-consecutive months since July 2007. The data are not seasonally adjusted – which is why the chart presents the 3-month moving average – and on an average basis, income tax receipts have not fallen since August 2005.

The individual tax receipts show a US economy that has clearly slowed but not tumbled into an abyss, as corporate taxes would imply. This is consistent with the labor market data, which is certainly soft, but not plummeting as it did in previous recessions.

According to US tax receipts, it is the financial sector - undermined by assets tied to worthless subprime mortgages - that is feeling the brunt of the slump. Certainly, financial distress has seeped into the real economy, but consumers and nonfinancial firms remain resilient.

I still contend that the housing market is underscoring the problems in the US economy. If the housing market turns around, which will start this year, then related sectors will also improve. Specifically, the labor market, with its 600,000 construction jobs lost since last year, will show signs of revival or at least not be losing as many jobs.

Please leave comments. Best, Nontruths


  1. Ergo, the coporations will have to work 6 times as hard. Guess the scheduled loss of 34,000 airline jobs this fall will be just a small bubble burst. I wish I could really believe that the housing market will bottom this year.

  2. Hi Aunt Jane,

    To clarify - the housing market (on a whole) will certainly NOT bottom this year, just sales. Only when prices stop declining (well into next year) will the housing market bottom. Sorry.


  3. Despite the stats, I see thousands of high paying jobs posted on popular employment sites:


    With so many 100K and 150K jobs posted, I wonder about the stats.