4 Important Data Points That Show U.S. Economic Strength

by: Strubel Investment Management

Summary

Employment and wages are strong with payroll taxes up year over year.

Federal spending is up year over year.

The Federal deficit is growing.

Tax refunds are up $4B compared to last year.

We usually write about individual stocks; however, I want to start sharing our macro outlook with readers. While we are value investors and typically focus on fundamental analysis of individual companies, unlike some other value investors, we also pay close attention to the macroeconomic environment. After all, a company could have the greatest business model in the world but if the macroeconomic environment is unfavorable the investment won't work out.

While the market has rallied off its February lows there is still a lot of concern and fear out there and we have seen several large drops in the S&P 500 this week. Our view is that despite the headlines the US economy is strong and investors should "buy the dips" if they have cash on the sidelines. Indeed, all of our clients are fully invested.

Below we'll share four important data points that show the health of the US economy and why there is no need for investors to fear a slowdown in the US. All of the data comes directly from the US Daily Treasury Statement which, as you may guess from the name, is updated daily. Therefore, the following is about as real time a look into the US economy as you can get.

Payroll Tax Withholdings Are Increasing

The best way to get a peek into the health of the labor market in real time is to look at payroll tax withholding levels. Right now we can see that payroll tax withholdings have increased by almost $42B compared to last year.

Because payroll taxes are only paid on the first $118,500 of income, we know that most of the increase in payroll taxes is coming from higher employment numbers and higher wages at the lower end of the wage scale. While we can't tell the exact break down it doesn't matter very much for the economy as both new workers and lower wage workers receiving wage increases have high marginal propensities to spend. Either way the economy benefits.

Federal Spending is Up

Also very important is the total level of Federal spending. The US government is the largest single entity in the economy so its spending patterns have an enormous effect on the economy. The Federal government itself employs over 4 million people (civilian and military). Additionally many state and local governments receive substantial federal funding, so federal spending levels can affect nearly all 22 million people directly. This makes the US government by far the largest employer. It's also many companies' largest customer. Think how many routers and switches the government is buying from Cisco (NASDAQ:CSCO) or how many fleet vehicles it buys from Ford (NYSE:F). The more the government spends the more stimulus is added to the economy.

Since government spending is a hot topic politically, I just want to add a quick word of clarification. There is a difference between the government spending money and stimulating the economy and that being the best use of resources. If the government hired a thousand people to draw Obama's picture every day, that would stimulate the economy but it would be a horrible use of resources. Likewise, if we hired a thousand people to repair our roads and bridges, I think most of us would agree that would be a good use of government resources. We are not trying to say the government should or should not spend money on certain things. We are simply saying if they spend money, wisely or foolishly, it affects the economy.

Looking at Federal spending levels we can see that spending is up almost $75B compared to last year.

It's also not just spending that can impact the economy. If and how that spending is paid for, essentially the budget deficit, affects the economy as well. It's also here that libertarians (or anyone) who want a smaller government could get their version of spending, that is tax cuts. (Lower spending with more than offsetting tax cuts could provide the same benefit as higher spending). So feel free to root for whatever combination of stimulus you like best from a political perspective.

The Budget Deficit is Growing

When the government deficit spends, it adds net new financial assets to the economy. Deficit spending is also essential to allow the private sector of the economy to save. Think about it this way, the national debt is nothing more than all the treasury securities outstanding. All of the private sector savers out there hold those securities. The more treasury securities the private sector has the richer and better off it is. Therefore, a national debt and a deficit are essential to a well functioning economy. Additionally, an expanding deficit is a form of stimulus, as we saw after the financial crisis and as we can see in the ongoing austerity efforts across Europe that have hobbled their economies.

On the deficit front we have good news. After years of declining deficits (some of which was due to economic growth so it wasn't all bad) the sequestration caps have been eased and the deficit is projected to grow. Indeed, this year we have seen the deficit grow by $760B however this figure is likely to shrink dramatically to be close to the >$500B deficit projected by the CBO. For now it means the economy is receiving a lot of stimulus although the amount is likely to change.

The last data point we will look at is the least important but it can still be worthwhile to keep tabs on.

Tax Refunds Up Year over Year

How will you spend your tax refund? That's a question you hear a lot and retailers certainly make an effort to get you to spend your refund on their products. Just about every consumer facing company has some sort of tax refund promotion going on. For this time of year especially the state of IRS tax refunds is worth looking at as it gives a clue to how much consumers might be spending.

Here too we see good news with tax refunds up $4B year over year.

Summary

There really is nothing in the real time data we can see that would indicate any reason to worry about the US economy. Yes, we are in a profits recession for the manufacturing and energy sector due to the crash in oil prices and the strong dollar. But, it's nothing that should drag down the US economy or the broader market. Like we said at the beginning of the article, our clients are fully invested and we are taking the opportunity to selectively move some clients into more aggressive allocations.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.