Federal tax collections plunged in May, withholding taxes in particular. Those worried about a slowing economy now have real data to back them up. In fact, the consensus of worried economists isn’t worried enough. That consensus is for a gain of 328,000 jobs, versus 428,000 in April. But regardless of what the BLS’s, seasonally adjusted, randomized, and otherwise statistically tortured non farm payrolls report shows, the reality is much worse.
That reality is tax collections—actual hard data, in real time, and not statistically massaged. And they were down. Big time.
This means that, if reported accurately, subsequent economic data reports will be weak. They should show economic contraction. So the economy is contracting but inflation isn’t yet. Bad combination. But it’s not enough to give the Fed an excuse to reverse policy.
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The Fed typically isn’t quick enough on the trigger to respond to economic trend changes, and it has not yet shown any propensity to rescue the financial markets in this cycle.
I’ve warned about this before. Eventually weakening financial markets would trigger economic weakening. These two facets of the monetary coin are tied at the hip. Central bank tightening triggers visible effects first in the financial markets. But nearly concurrent effects, or at most slightly lagging, occur in economic activity. They’re just not as visible and as obvious at first. Mostly because economic data lags. But also because the initial economic changes are more subtle than the more visible changes in stock and bond prices and yields.
Furthermore, government agency statistical manipulation of the data adds a random element that often creates the misimpression that the economy is doing better or worse than it is. We don’t have that problem with the tax data. It is what it is.
Now we have the first real, hard data that shows that the economy is in fact weakening, along with the financial markets. But we have yet to see any evidence that inflation is coming down.
The Fed is now in that Catch 22 phase that we knew had to come. And because of the fraudulent way that the Federal Government economic reporting agencies report inflation, the popular inflation gauges will lag as inflation moderates.
The Fed will follow the reported data, so it will be slow to respond to disinflation, when it comes, just as it was slow to respond to inflation, even after it was obvious. The Fed just refused to believe. It will likely be equally disbelieving in accepting the first signs of disinflation.
So the adverse monetary conditions are likely to persist until after financial markets have passed the point of no return. Don’t pin your hopes on economic weakness to rescue the markets. Stay focused on monetary policy, and on liquidity. This report show exactly what the real data is telling us. It shows the impact of that, the implications for the trends of stock and bond prices, and it gives you clear analysis about what to do about it to protect, and even grow your capital under these conditions.
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