Posts filed under “Taxes and Policy”

Trimtabs Continues to Abuse Withholding Data

Yesterday’s Gartman Letter (TGL) featured a discussion about withholding tax data (via Trimtabs); I received several questions about it from various quarters. In short, the Trimtabs’ analysis was simply wrong. The data below reveals the how and why.

TGL quoted Charles Biderman of Trimtabs, who stated:

"The US economy is improving rather than deteriorating. The income and employment taxes withheld from the paychecks of all U.S. workers on payrolls rose 3.1% year-over-year in the past two weeks and one day (Friday, April 4 through Friday, April 18). Withholdings on the latest Friday this year were 13.2% higher than withholdings on the same Friday last year, and the growth rate will probably rise further once withholdings for Monday are available. The growth rates we have been measuring are definitely not indicative of an economy sliding into a deep recession. (emphasis added)

Trimtabs seems to have a fundamental misunderstanding about the withholding data series. Their conclusions are not merely unsubstantiated by the data — they are directly contradicted by it. To be blunt, this was one of the weakest, most poorly reasoned and mathematically challenged analyses I have read in two decades on Wall Street. A brief review of the charts of the withholding data shows what an absurdity the Trimtabs commentary is.

Let’s start at the 2001 recession. In the beginning of that contraction, withholding taxes fell slightly. Further into the recession, W/H actually rose. Then much deeper into the recession, W/H plummeted. This is consistent with what you would expect from an employment related data series, as employment is a lagging indicator 
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Withholding Taxes, Quarter over Quarter Growth Rate
Withholding_taxes_quarter_over_quar

  Withholding Taxes, Yearly Growth Rate

Withholding_taxes_yearly_growth

(Data through April 21, 2008)
charts courtesy of Matt Trivisonno

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Based on the above, one is forced to wonder how a conclusion could be reached that the recession — which has yet to produce negative year-over-year WH — is already over, and now in recovery. If anything, based on this one single metric, it is still in the very early stages when compared to the recession of 2001. And, if this recession turns out to "only" be as bad as the last, mild contraction, the W/H data still has a long away to go. If it is appreciably worse than ’01 (as I fear it might), then W/H data has yet to even begin to approach its worst levels.

Indeed, earlier this month — based on what appears to be a similarly erroneous misinterpretation of the W/H data — Trimtabs announced that "The recession was over" (see this Marketwatch article). 

Why? The 4.1% year-over-year W/H. That sounds like a good number — until you actually look at the full data series:>

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Does this Weekly Chart look encouraging to you?
Wh_year_over_12_months

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That chart is hardly impressive; once you put the year-over-year gains of 4.1% into historical context, it makes you wonder what the hell Trimtabs is looking at.

Lastly, note that the witholding data series is quite volatile, and fluctuates dramatically from day to day. Looking at the data as a series – rather than any single day or week — provides a much less random basis for drawing any conclusions about what the general trend in tax withholding is, and what it might mean.

I cannot reproduce Trimtabs 13.2% single day data. However, looking back over the past 12 months "one day at time " series, we are left with the conclusion that at best, a huge change in a single day’s data is most likely an enormous outlier to the rest of the W/H data series.   

Here is the most recent data through April 18, 2008 showing both the volatility and the overall trend:

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Withholding Taxes — Y/Y Daily Growth

Withholding_taxes_yy_daily_growth

(Data through April 21, 2008)
charts courtesy of Matt Trivisonno

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Under most circumstances, the normal state of W/H is for it to nominally increase. Except for the most severe slowdowns (i.e., recessions), it reflects both an increasing population and ordinary inflation. This natural expansion is not reflective of any fundamental improvements in the US economy.

This most recent analysis by Charles Biderman is more reflective of psychology: There is still too much bullish sentiment. We have not seen any of the deep despair that typically accompanies lasting bottoms. Instead, there seems to be a desperate attempt to grasp at bullish straws — regardless of the data. This is symptomatic of early, not latter stages of a bear market.

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Previously:
Changes in US Withholding Taxes (March 24, 2008)
http://bigpicture.typepad.com/comments/2008/03/changes-in-us-w.html

TrimTabs: Its a Recession, and Its Already Over (Wrong) (April 02, 2008) http://bigpicture.typepad.com/comments/2008/04/trimtabs-its-a.html

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