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Economy in Brief

Uh-Oh!: Record Drop in Taxes Signal Deep Consumer Recession
by Joseph G. Carson ([email protected])  May 14, 2020

In April, federal withheld income tax collections posted a record drop from year-ago levels. The scale of the decline indicates that the reported figures on job loss and unemployment are understating the collapse in labor markets. How many companies have ever stress-tested their sales plans for a 25% to 30% jobless rate? What's the new normal level of consumer spending?

Federal Tax Receipts Tank
In April, federal withheld income (gross) tax receipts totaled $79.6 billion, off 30% from year-ago levels. The scale of the decline is the largest on record since the monthly data started being reported in 1972. Before the April 2020 tax data was released, the largest monthly year on year decline in federal withheld income tax collections occurred in September 2009, off 21.7%, at the end of the Great Financial Recession. April tax receipts indicate that as ugly as last month's jobs report was it may have understated the scale of job loss and rise in unemployment.

In April, the household employment survey showed that 22.4 million people lost their jobs, lifting the unemployment rate to 14.7%, up from 4.4% in March, an increase of 10.3 percentage points in one month. The one-month increase was larger than any annual increase on record, even during the years of the Great Depression. One of the curious parts of the April employment report was the exodus of 6.4 million people from the workforce. If people did not exit the workforce in record numbers last month, the jobless rate would have topped 18%. Confusion over new federal legislation for unemployment compensation may have led people to misstate their labor force status last month.

Congress passed the Coranavirus Aid, Relief, and Economic Security (CARES) Act in late March. This legislation provided an extra $600 weekly payment in unemployment compensation; increased the number of weeks an individual may receive benefits; and expanded the coverage to self-employed and individual contractors who traditionally were not eligible under state law. Initially, states were waiting for updated guidelines from the Labor Department eligibility issue. Now that states and people are better informed about the eligibility issue people that exited in April will need to re-enter to be eligible to collect jobless benefits.

As a result, the May jobless rate could spike 10 percentage points to 25% reflecting a surge in re-entrants and new job losers. How many companies have ever stress-tested for 25% unemployment? With record-high joblessness, what's the new normal level of consumer demand for vehicles, travel, smartphones, etc? Investors need to rethink company sales and profits expectations based on a much lower level of consumer sales.

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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