1. Atlanta Fed Now Predicts 3.8% GDP Growth For 3Q
  2. Government Collects Record Income & Payroll Taxes
  3. Americans’ Mobility — Lowest on Record, Especially Rural
  4. Household Debt Hits Another Record High in the 2Q

Overview

As I discussed at length last week, the US economy is gaining momentum. The Federal Reserve Bank of Atlanta estimates that GDP is growing at an annual rate of 3.8% in the current quarter. That’s well above most economists’ forecasts, as I will discuss below.

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On the other hand, the Federal Reserve Bank of New York estimates that 3Q GDP growth is expanding at the rate of only 2.1%, which is even lower than the 2.6% 2Q rate reported by the Commerce Department. So what gives? I’ll give you my thoughts as we go along today.

The Treasury Department reported last week that it has collected record amounts of individual income taxes and payroll taxes in the first 10 months of fiscal year 2017, which began last October. This is more good news for the economy.

But not all the news is good. Americans’ mobility rate – the willingness to relocate to find better jobs, etc. – has fallen to a new record low. This is especially true in rural America. I’ll offer some thoughts on this concerning trend below.

Finally, US household debt hit yet another record high in July. While some economists say this is a good thing, I’ll argue to the contrary as we go along today. It’s a lot to cover in one letter, so let’s get started.

Atlanta Fed Now Predicts 3.8% GDP Growth For 3Q

The Federal Reserve Bank of Atlanta now predicts that the economy is growing at an annual rate of 3.8% in the 3Q based on its latest “GDPNow” model. The latest forecast shown below is considerably more optimistic than the average of forecasters tracked by Blue Chip Economic Indicators. The average of Blue Chip’s top 10 and bottom 10 forecasters has the economy growing by only 2.7% (annual rate) in the current quarter.

US Economy

The Atlanta Fed’s GDPNow index is based on strength or weakness in 13 sub-components of the economy. This relatively new forecast from the Fed has had a tendency to be overly optimistic in the last year or so since I’ve been following it. My bet is that it’s overly optimistic again this time, but we won’t know until we get the Commerce Department’s first estimate of 3Q GDP at the end of October.

As I emphasized in last week’s E-Letter, the economy is improving, but I doubt it has improved to a rate of 3.8% growth as suggested above. Interestingly, the Federal Reserve Bank of New York recently introduced a similar current GDP estimate which it refers to as “Nowcast.”  The New York Fed says its Nowcast estimate is based on a “wide range of macroeconomic data.”

The latest Nowcast had GDP growing by only 2.1% (annual rate) in the current quarter as of last Friday.

The New York Fed Staff Nowcast

US Economy

Obviously, there is a big discrepancy between the NY Fed’s forecast of 2.1% and the Atlanta Fed’s forecast of 3.8%. In fact, if the NY Fed’s 2.1% is accurate, that means economic growth has actually slowed from the 2.6% GDP growth in the 2Q. We get our next 2Q GDP estimate from the Commerce Department late next week.

Since the NY Fed Nowcast has only been in existence for a few months, I can’t say whether it has a bias one way or the other. However, it is my opinion that the economy has strengthened this summer, as I discussed in detail last week. It may well be that the Atlanta Fed’s 3.8% is too high and the NY Fed’s 2.1% is too low.

It could well be that we see our first quarterly GDP report above 3% since the 1Q of 2015. Keep in mind that the initial report from the Commerce Department for the 3Q will not be out until late October. In the meantime, we’ll get the government’s second estimate of 2Q GDP late next week. I’ll have more analysis after that report is released.

Government Collects Record Income & Payroll Taxes

Here is another bit of news which supports the view that the economy is strengthening. The Treasury Department reported last week that the federal government collected record amounts of both individual income taxes and payroll taxes through the first 10 months of fiscal 2017 (Oct. 1, 2016 through the end of July).

Through July, the federal government collected apprx. $1.313 trillion in individual income taxes.  At the same time, it collected over $976 billion in Social Security and other payroll taxes.

Prior to this year, fiscal 2015 held the record for individual income tax collections through July. That year, the Treasury collected $1.309 trillion (in constant 2017 dollars) in individual income taxes in the first 10 months of the fiscal year.

US Economy

Source: Treasury Department

This year’s record of $1.313 trillion in October-to-July individual income taxes is apprx. $4 billion more than 2015’s previous record of $1.309 trillion.

Before this year’s record of $976 billion in October-through-July payroll tax collections, fiscal 2016 held the previous record at $949 billion (in constant 2017 dollars) -- or about $27 billion less than this year.

Overall federal tax collections in the first 10 months of fiscal 2017 were $2.740 trillion.

While the Treasury has been collecting record amounts of individual income taxes and payroll taxes this fiscal year, some other categories of federal tax revenues have declined since 2015. These include lower corporate income taxes, customs duties and excise taxes.

Even as it was collecting record individual income and payroll taxes in the first 10 months of fiscal 2017, the Treasury still ran a deficit of $566 billion as of last month. That is because while the overall federal tax collections for the period were $2.740 trillion, overall federal spending was $3.306 trillion.

The Congressional Budget Office projects that the federal budget deficit for all of FY2017 will be $693 billion, up from $585 billion in FY2016. The largest annual budget deficit ever occurred in FY2009 at $1.413 trillion following the Great Recession.

Finally, the fact that individual income taxes and payroll taxes set new records for the first 10 months of this fiscal year is yet another sign that the economy is gaining momentum.

Americans’ Mobility -- Lowest on Record, Especially Rural

So much for the good news on the economy. This and the next topic below are not good news.

Americans are less mobile today than at any time since records have been kept, and researchers aren’t absolutely sure why. This trend of staying put has been increasing rapidly since the 1980s, and it includes virtually all age groups.

The decision to relocate reflects something very fundamental about one’s life. People move for better jobs, for marriages, for a different climate, for new and different social networks or sometimes just to shake things up. Or at least they used to.

Americans traditionally have thought of themselves as the “great movers,” and indeed that was true in the 19th century and even through most of the 20th. But since the 1980s, Americans have become much less willing to move across the country, and more people are looking to simply stay put and entrench themselves where they are.

In fact, the US mobility rate from state to state has steadily fallen 51% below its 1948–1971 average, and that number has been falling even more rapidly since the mid-1980s. If we look just at the rate of moving between counties within a state, it has fallen by 31% since the 1980s. Even the rate of moving within a county fell 38%.

The Growing Reluctance to Relocate

The share of Americans who relocated in the past year was the lowest on record since measurement began.

US Economy

Source: US Census Bureau

Those are pretty steep drops for a country that has not changed its fundamental economic or political systems. You might think that the exponential growth in Information Technology (IT) would make it easier to find a job on the other side of the country, and maybe it has, but that has not been the dominant effect. If anything, Americans have used the dynamism of IT to help themselves stay put, not to move around.

This trend is particularly pronounced in rural America where jobs are increasingly disappearing. The Wall Street Journal reported earlier this year that in rural America, the rate of people moving from just one county to another was only 4.1% in 2015, down by nearly half since the late 1970s.

This drop in mobility is not only keeping rural residents from climbing the ladder to better livelihoods; it is choking off the labor supply for employers in areas where jobs are plentiful. This limits the economic growth that naturally occurs when people and capital cluster together.

It has also contributed to the nation’s deepening political divide. Small-town residents fed a populist revolt that helped put Donald Trump in the White House last year. This reinforced the administration’s plan to focus on issues such as curbing immigration and creating jobs through infrastructure spending.

Perhaps the most glaring statistic for rural America is that the unemployment rate has averaged 7.7% over the past year, compared with 4.7% nationally. This is an increasing national problem with serious long-term consequences for our nation. I’ll have more to say on this topic in the weeks and months ahead.

Household Debt Hits Another Record High in the 2Q

American household debt level hit another record high in the 2Q, after having set a record high in the 1Q. Total US household debt was $12.84 trillion in the three months ended June, up $552 billion from a year ago, according to a Federal Reserve Bank of New York report published last week.

U.S. Household Debt Balance & Composition

US Economy

Source: Federal Reserve Bank of New York

The proportion of overall debt that was delinquent in the 2Q was at 4.8%, about the same as in the 1Q. However, a red flag was raised over the transition of credit card balances into delinquency, which the New York Fed said “ticked up notably.”

Loosening lending standards have allowed more borrowers with lower credit scores to access credit cards this year. The rise in credit card delinquency rates can be an early indicator of future trends, which means we need to keep a close watch on this indicator.

Total US household indebtedness is now about 14% above the trough of household deleveraging brought on by the 2007-2009 financial crisis and deep recession -- a pullback that interrupted what had been a 63-year upward trend.

Mortgage debt was $8.69 trillion in the 2Q, up $329 billion from last year, the report said. Student loan debt set yet another new record at $1.34 trillion, up $85 billion, while auto loan debt came in at $1.19 trillion, up $55 billion.

I should point out that some economists insist that rising household debt is a positive indicator for the economy. They have a point in that borrowing tends to increase consumer spending, which accounts for apprx. 70% of GDP.

Yet as we all know, rising household debt can’t continue forever. The next time there is another negative economic surprise, consumers will pull back on debt and deleverage, just as they did in 2008 and 2009. This, of course, can lead to a recession. And the higher household debt goes, the more it can fall.

YCG Investments Webinar Recorded Version Now Available

If you were not able to attend the live webinar with YCG Investments last week, you can download the recorded version and listen to it at your convenience. The webinar was very interesting especially in light of today’s uncertain market conditions.

All the best,

Gary D. Halbert

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