VIPs
- While tax refunds usually exceed tax receipts, income tax receipts as of April 17th hit a new record $99.43B, nearly $5B more than April 2018’s prior full-month record with 7 business days remaining; 2019 income tax refunds are also lower by $8B v 2018
- According to Goldman Sachs, the net negative impact to household budgets was approximately $19B as of April 16; this year’s tax season suggests second quarter consumption maybe weaker than expected
- March retail sales hit an 18-month high driven by auto sales reported in dollars versus units; core retail sales rose by 1% in March and on a dollar-basis have only risen 0.2% from November
- First quarter estimates suggest growth will approach 3%, which has only occurred in three other first quarters in the current cycle; adding the tax season to the rise in gasoline prices, households could feel an impact of $100B budgetary shock going forward
- Mortgage rates have declined nearly one percent since October 2018, yet single family housing permits hit a 19-month low; data in coming months will determine whether the combination of Chinese and Fed easing is enough to sustain economic momentum
There’s nothing like a good sonic boom to bolster morale. At least that was the thinking among Air Force generals during the Vietnam War. The SR-71 Blackbird had more practical military applications than Hanoi Hilton flyovers; they supported B-52 raids by jamming enemy radar, no doubt vexing our enemies. Upon first laying eyes on the long, sleek jet, the Okinawan locals decided it looked just like the “habu,” the wickedly venomous viper snake indigenous to the area around Kadena Airforce Base, the remote base the Blackbird called home. The fastest surface-to-air missiles of the era detonated some two miles behind the supersonic stealth fighter, more than justifying its nickname. Next time you’re in D.C., stop by the National Space and Air Museum to see this mammoth marvel up close and personal. You’ll agree its “stealth” is a miracle of engineering.
Uncle Sam has been up to some stealth of his own in recent years. As you can see in data back to 1993, it was once the norm that tax refunds exceeded tax receipts. Not only has the long-standing balance of that relationship broken down in recent years, but the shift is now accelerating. Yes, we are earning more, a good thing. And yes, rising incomes naturally trigger more taxes paid to the government.
But, that does not mean many American families were prepared to write bigger checks to the IRS, especially this year. And yet, income tax receipts stood at $99.43 billion as of April 17th. Not only is this figure the highest on record, it’s nearly $5 billion more than the prior record holder, April 2018 with seven business days remaining in April. Meanwhile, refunds are lower than they were in 2018 by $8 billion. Whatever the total figure is by the time May 1strolls around, the “stealth” aspect of rising income taxes will have been vanquished, an observation that is in no way a political statement.
In the consumption-driven economy 350 million Americans call home, take-home pay drives the train. And while we recognize that perfect tax planning means you never receive a penny of tax refund, as in you never made the government a loan, many households do not share in this thinking. Right or fiscally wrong, many families use refunds to pay down debts or fund fun times they wouldn’t otherwise be disciplined enough to save for. As for paying income taxes families have not budgeted for, that will be akin to being on the receiving end of a bomb they never heard coming.
Goldman Sachs’ Spencer Hill put the net hit to household budgets at -$19 billion as of April 16th. And we know things just got worse on the 17th. “Just as we found that the timing of tax refunds affects the monthly cadence of consumer spending, year-over-year changes in tax-season cash flows can impact the quarterly pace of consumption growth…when net refunds rise as a share of disposable income, consumption growth tends to be stronger in the second quarter on average.”
The flip side of Hill’s logic suggests second-quarter consumption growth may be weaker than expected.Add rising gasoline prices to tax season shock and households could feel the equivalent of a $100 billion budgetary shock.
And yet, we know March retail sales hit an 18-month high, driven in part by high car prices given auto sales are reported in dollars as opposed to units, which were down 3.1% in March. Wards also released fresh data on March auto production being down 6.4% after February’s 4.6% slide. The risk is rising that an adverse feedback loop is firing up as auto job losses pressure spending.
QI friend Peter Boockvar focuses on ‘core’ retail sales, which exclude autos, gasoline and building materials and feed GDP. His bottom line: even with the 1% core rebound in March, on a dollar-basis, core sales are up just 0.2% from where they were in November.
There’s no denying this will be a stand-out first quarter. Estimates peg growth to possibly hit 3%, something that’s occurred in only three other first quarters in the current cycle that’s been plagued by anemic starts to the year.
It’s hard to imagine growth not rebounding on the heels of 99 basis points of easing care of the rates fairy, Chair Powell. On October 11, 2018, 30-year mortgage rates hit a cycle high of 5.05%. A few weeks back, they’d skidded to 4.06%. Perhaps we should be asking why March permits to build single-family homes fell to the lowest since August 2017.
The months to come will determine whether the combination of Chinese and Fed easing is sufficient to sustain economic momentum. In the little-known department, only two Blackbirds were ever lost, both due to mechanical failures, not enemy fire. Policymakers can ill afford to suffer mechanical failure on the easing front. The transmission mechanism to housing and autos must hold.