Interesting Correlation

Dailyjobsupdate.com has a wealth of real time information that attempts to track the direction of the economy. It pays particular attention to payroll taxes withheld and remitted to the Treasury. The following chart plots the year over year growth rate in this indicator versus the S&P 500. The following chart shows a very tight correlation between the two.

One of the challenges with the methodology, however, is that whenever tax rates change (e.g. full payroll tax reinstatement) or there is an unusual surge in employment (e.g. when the census workers were hired on a temporary basis), the growth rates can be skewed. To correct for this, they have developed a mechanism to adjust the data for those one time events. The following chart shows the S&P 500 versus the adjusted growth rate.

 

This chart shows a significant divergence between Wall Street and Main Street. With the sequester impact not fully felt, Europe still quite weak, China slowing, and a big spike in mortgage rates (as the following graph shows), it feels like the financial markets may have gotten ahead of themselves. The above chart does represent a fairly material deceleration in labor market growth which is obviously not good for the economy and should lead to the Fed continuing to be quite accommodative in its monetary policy, even if it begins to slow the rate of accumulation of U.S. Treasuries and mortgage-backed securities.

Source: www.bespokeinvest.com

 


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