Why Is This Key Economic Metric Showing Continued Declines?

Includes: DIA, QQQ, SPY
by: Trading Alpha

Every month we are presented an array of economic statistics - some from the government, some from private companies and organizations. And every month we go through the ups and downs of interpreting potentially good news only to have a spat of bad news change momentum. The fog of the great recession still hangs thick over the economic landscape and pundants are squinting their eyes, sometimes closing one eye and taking their best shot.

We are fed data about job losses but, as has been dissected very well on this site, there are a number of flaws to this data. It’s only a partial survey. It has suspect assumptions and gets massively revised. It only measures people for a period of time etc..

We also know that many people are taking jobs at much lower pay but our ata does not really seem to capture this in the metrics, The same is true with a shorter work week.

On the corporate side, we also are largely dependent on the old "met expectations" game, a game corporate America seems to have gotten really skilled at playing. Why is the performance relative to the prior period always downplayed by the MSM? And what about the continued focus on non-GAAP, a fictional depiction of corporate results that has no rules? How do we draw conclusions about an economic rebound based on companies meeting expectations?

The good news is there is a timely monthly metric that cuts across our entire economy. Ironically, it comes from the Federal Reserve and it came out yesterday, a bit later than normal due to the heavy snows in D.C. This monthly metric is relevant, representative and apparent monkey proof. At least thus far, the government has not thought up some crazy assumptions to augment this metric because it is so basic. Cash receipts for the month. Mostly from tax payments and withholdings from individuals and corporations, this month's cash receipts is in my view and all in one metric.

If the economy has turned, we should see some element of stabilization or rebound.

One drawback to the metric is it is lumpy. Big tax payment months like April and January skew the number so some smoothing or seasonal analysis is needed to compare Y/Y comparisons or smoothed results.

Here are the updated results that include the month of January 2010. Months of the U.S. government's fiscal year are listed on the bottom and presented in order for the federal fiscal year, which ends on September 30.

So how did this metric do in calling the economic downturn in 2008? Pretty well. Look at the F'08 performance for the federal fiscal year ended 9/30/08 - the red color. It went negative in January 2008 and and stayed consistently negative in May 2008. This tells me it is a good and responsive predictor.

So what does it tell us about the recovery that may have started in March 2009?

Well, for starters, it tells me one cannot see this in the federal receipts at all. We have consistently been down each month since March 2009, now ten months in a row.

Further, the Y/Y monthly results are only slightly better. January 2009 was down 11% from January 2008. January 2010 was down 9% from January 2009, but this was sequentially up from December's results being down 8% from December 2008.

So what is happening here? Are we becoming like Greece in yet another way, whereby a shadow economy is developing to effectively hide economic activity from taxes and this is why the recovery is not showing up in the federal receipts? Not likely.

Are we measuring the wrong types of metrics like non-GAAP and total jobs without cutting through it all to see the underlying economics? Probably.

I invite a debate on this important topic to gain more visibility into this important metric which may be found on the Federal Reserve website typically around ten days after month end.

Federal receipts

Disclosure: No stocks mentioned