Many pundits use Federal Government revenues as a pulse point for understanding the economy. If government revenues are a good tool, then the economy over the last two months should be expanding robustly as revenues are growing in double digits. It makes sense - all things being equal - that increased tax revenue means people and business are more profitable and / or sales are increasing.
On average since 2000, government revenues have averaged a 2.5% increase year-over-year (GDP has averaged 1.8% year-over-year growth).
Some tax revenue is coincident with economic activity, but all important profits would be a lagging indicator as profit should be unknown until the end of a calendar year. For me, little is revealed by looking at government revenue. The primary problem is that it lags and is very noisy (I will ignore changing tax laws) - and is poor in spotting a recession. The graph below uses the government revenues, and shows year-over-year change.
One cautionary note: Although still growing year-over-year, the rate of growth in personal withholding revenues has been decreasing over the past several weeks which indicates that employment growth in May may be less than has been experienced so far in 2012. This would be a continuation of the disappointing job growth numbers that were reported in April.
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One positive aspect of watching government revenues is that there is little significant backward revision, so data is good in real time. It is possible to remove much of the noise in government revenue by using a three month rolling average of the data.
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Take a look at the recession in the early '90s - the contraction in government revenues did not occur until the recession ended. Even if one uses trend lines, the trends go up and down without a recession occurring. Comparing government revenues to GDP.
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The question of the day is growing government tax revenues forecasting (or showing) an improving economy. In my opinion, correlations between economic growth (expressed as GDP) and government revenues are not good enough to use as a forecasting tool on its own.
However, the current trend of improving government revenue growth is a positive signal. There has never been a positive growth trend leading into any recession since 1990 - but there has been many negative growth trends which have never evolved into a recession.
Click here for a summary and analysis of this past week's economic releases
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
