Echo

A proxy for nominal aggregate demand and payroll growth: Treasury receipts are recovering...

Saturday, October 23, 2010

I present an update on aggregate demand using the highest frequency of economic data available, US Treasury tax receipts. Tax receipts serve as a proxy for nominal aggregate demand via a nominal indicator of private payroll growth.

US daily Treasury tax receipts are improving. (This chart has been modified since its original posting to enable reader to click to enlarge).

The chart illustrates the federal deposits of income and employment taxes that are recorded on a daily basis and presented here as the annual pace of the 30-day rolling sum. The red line illustrates the average annual growth rate spanning the period 2005-current.

Since roughly April of 2010, the annual pace of income and employment tax receipts has been above the average, 2.8%. In the third quarter, the annual pace of income and employment tax receipts remained around 4%, consistent with the second quarter pace. Hours and employment are improving, supporting wage gains and higher tax receipts. But more importantly, the pace of tax receipt growth has not faltered, demonstrating ongoing recovery in the labor market and consumer demand.

But it's not enough. The gains in tax receipts are likely a function of firms adding back hours instead of pumping up the work force. (see my previous post with links on the "hourless recovery").

The chart above illustrates the cyclical loss from recession and gains during the recovery of private net-jobs (payroll) and aggregate weekly hours (you can see the summary data from the September payroll report here).

Both series found a trough in the third quarter of 2009, which is consistent with the bottom in tax receipt growth (chart above). However, the hours index has recovered quicker than has its payroll counterpart (of course it fell farther, too). To date, both private hours and payroll are 7% short of their values at the peak of the economic cycle.

Receipts are growing, but not vigorously enough to indicate any shift in the current trajectory of payroll growth. Therefore, nominal aggregate demand remains weak. Furthermore, the still-nascent household deleveraging cycle is very likely moving at snail-speed (see this article for a discussion of the link between consumption growth, income growth, and deleveraging for today's commentary).

Rebecca Wilder

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