Recession Alert: Government Revenues Suffer Biggest Drop Since The Financial Crisis

On the surface, today's monthly budget statement was disappointing: in March the US Treasury brought in total receipts of $216 billion, below the $228 billion last March, versus outlays of a record $392 billion, resulting in a deficit of $176 billion, more than the $167 billion expected, and $68 billion more than the previous year. For the fiscal year through March 31, the total US budget deficit was $527 billion, compared to $459 billion on year ago.

Declining government revenue and long-term costs associated with an aging population are expected to continue pushing up the deficit. Over the past 12 months, the deficit stood at $651.5 billion, compared with $460.6 billion a year ago, an increase of over 40% Y/Y.

On a 12 month run-rate, the US deficit stood at 3.1% of GDP. A year earlier, that figure was a third less, or 2.2%.

More troubling is that in March the US government had its biggest one month outlay ever, spending a record $392.8 billion, $57 billion or 17%  higher than a year ago.

The break down of March spending was as follows:

  • Defense: $58 billion
  • Social Security: 79 billion
  • Medicare: $75 billion
  • Interest on debt: $30 billion
  • Other: $151 billion

However, the most concerning picture emerges when looking at the annual change in the rolling 12 month total. It is here that we find that, like last month, in the LTM period ended March 31, total federal revenues, tracked as government receipts on the Treasury's statement, were $3.264 trillion. This amount was 1.3% lower than the $3.31 trillion reported one year ago, and was the fourth consecutive month of declines. This was also the biggest drop since the summer of 2008.

Why is this important? Because as the chart below shows, every time since at least 1970 when government receipts have turned negative on an annual basis, the US was on the cusp of, or already in, a recession. Indicatively, the last time government receipts turned negative was in July of 2008.

One potential mitigating factor this time is that much of the collapse in receipts is due to a double digit % plunge in corporate income tax, which begs the question what are real corporate earnings? While we keep hearing that EPS are rising, at least for IRS purposes, corporate America is in a recession. As for that far more important indicator of overall US economic health, and biggest contributor to government revenue, individual income taxes? As of February, the YTD number was $695Bn, just fractionally higher than the same period a year ago.

Weak corporate profits have weighed on government finances in recent years amid sluggish global economic growth, depressed energy prices and a strong dollar, among other factors. At the same time, government spending continues to rise as the population grows older and more people qualify for Social Security and Medicare.

The latest, and most troubling budget report in this economic cyle, comes as the Trump administration and Republicans in Congress are weighing proposals to further cut corporate taxes, which would lead to even steeper declines in government receipts, while boosting spending on infrastructure, which are likely to spark a broader debate about tax and spending policies.

As to whether the 4th consecutive decline in tax receipts is indicative of a recession as it has been in the past, we'll just have to wait. If Trump indeed wants a lower dollar and even lower interest rates, this may be just the catalyst that assures he gets precisely what he wants, killing any hopes of Fed rate hikes for the foreseeable future.