Wages and salaries will be down in first quarter


By Charles Biderman


Now that we know that income and employment taxes for all workers are going to rise by about $150 billion or so this year, I am fairly confident that wages and salaries are likely to decline in the first quarter of 2013.


The $150 billion in higher taxes is made up of $110 billion from higher employment taxes, $10 billion for Obama care and $30 billion in higher taxes on rich folk. $150 billion in higher taxes reduces by more than 40% all of last year’s $360 billion, or 5.9% increase, in after-tax wages and salaries. Some of 2012’s $360 billion gain was the result of many high-tax bracket types, who in anticipation of increased taxes in 2013, took bonuses and income in November and December of last year instead of the first quarter of this year.


Using our blog site table on US income, wages and salaries rose $103 billion in Q1 2012 vs. Q1 2011. So if Q1 taxes this year grow $40 billion and if $40 to $50 billion of bonus income was recognized in Q4 of 2012, that means before we look at anything else, there will be no year over year income growth in the first quarter of 2013.


The reason I think incomes actually will be down in the first quarter of this year also includes Europe. Remember Europe? The total European economy is in free fall.


And then there is the single family home market. The bulls believe that housing growth will boost the US economy this year. Indeed 2012’s first quarter growth was partly due to a pickup in housing. Unfortunately that will not happen in Q1 of this year.


Mark Hanson at mhanson.com says that last week’s November new home sales report continued to show weakness and not the strength as shown by the seasonally adjusted numbers. Ignoring seasonal adjustments, new home sales fell 7 percent month over month. The non adjusted series, which tracks the true organic demand for homes, peaked in March and has lagged consensus sales estimates. There’s been an even bigger disparity for months between true demand for homes and home builder stock prices. Therefore, Mark says, unless mortgage rates drop below 3 percent, new home sales will be slow.


All this leads us to the real question: Will there be a pickup in the economy in Q2 from a likely first quarter drop in after tax income? I do not think so, although it is possible. The answer to that question will determine if the US enters another recession, which to me is six months of declining after tax wages and salaries. As I’ve said many times before, there’s no basis in reality for using GDP as a benchmark for a recession.


Despite the hoopla that Congress saved us from going over the so-called fiscal cliff, reality is that a key component–lower government spending–is not being addressed. I personally believe that Obama will keep spending our money until it runs out.


Listening to the spending apologists makes me nauseous. A recent column in the New Yorker said cutting entitlement spending now is not necessary because we can easily adjust future entitlements to save the system. But the spending apologists never use any numbers to back up their nonsense.


Here are the real numbers. Last year, employment taxes were something over $600 billion and old folks like me paid $100 billion towards our Medicare coverage. The Heritage Foundation reports that total Social Security and Medicare spending was $1.28 trillion. In other words, even by boosting payroll taxes $110 billion, the entitlement deficit will still be a half a trillion dollars.


Today there are 2.9 workers for every retiree. In 20 years that drops to 2 workers for every retiree. That means the entitlement gap between employment taxes paid and the amount spent has to surge, even if the retirement age is boosted to 70 and means testing begins.


So to recap the US government will borrow or print $1.1 trillion to fund the government’s operating deficit and the entitlement gap. As bizarre as it sounds, the Federal Reserve is printing another half a trillion a year currently to keep interest rates low. So while income growth drops to zero and the government borrows and prints over $1.5 trillion how can the credit agencies not downgrade this financial disaster in the making?


Did anyone else notice that Obama has no friends in Congress and it took Joe Biden to work out a deal? Joe Biden? Is this what the financial future of the US has come to: Joe Biden and Paul Krugman saying deficits do not matter and the New Yorker pooh-poohing the entitlement gap?



3 Responses to Wages and salaries will be down in first quarter

  1. PAUL SMITH on January 3, 2013 at 4:30 pm

    Timely analysis. What does the GDP calculators in the federal govt. say about using personal income (before or after taxes) as a proxy for economic growth?

  2. ying on January 3, 2013 at 7:20 pm

    Why not adjusted the pre/after tax data with labor participation ratio and employment data and demographic change?
    How to interpret ADP # coming out today ? Should ADP # less accurate because they only track part of private sector?

  3. Ed_B on January 4, 2013 at 10:49 pm

    Like a drug junkie, the US Gov will spend every possible cent they can and for very the same reason – they are totally addicted to spending other people’s money. Having watched the US Gov and various other news items for the better part of 50 years, it is my considered opinion that if the US Gov could take ALL of the money now in circulation, they would still be operating in deficit. This is not a revenue problem because revenue has not been, is not now, and never will be sufficient, no matter how high it goes. Spending will always exceed revenue, until as Charles says, they simply cannot do it any longer. That will be the true fiscal cliff and its resolution will not be in DC’s hands. It will be in the hands of those who refuse to lend Uncle Sam any more money.

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Charles BidermanCharles Biderman is the Chairman of TrimTabs Investment Research and Portfolio Manager of the TrimTabs Float Shrink ETF (TTFS)

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