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By New_Deal_democrat July 26, 2017 8:25 am
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Do daily corporate tax receipts forecast quarterly profits?

Sometimes it's worthwhile to show you something that doesn't pan out, just to show you that I don't cherry-pick data. It has to be worthwhile and reasonably consistent for me to include it in my surveys.

Such is the case with corporate federal income tax payments. These are updated each day in the Treasury Statement, the same source I use for withholding tax payments each week.  Why did I examine them?  Because corporate profits are a long leading indicator, but are handicapped by being reported only once a quarter, and then with at least two months' lag.  For example, although Q2 will be reported this week, corporate profits for Q2 won't be reported until at least one more month.

My first thought was that I could include these as part of my weekly high frequency data report.  Here's the problem: almost no corporate income tax payments are made in the first 11 weeks of the quarter.  Almost all are paid in the last two weeks. So tracking them weekly would add no value.

For example, of the $125.9 Billion in corporate income tax paid in Q2, only $67.5 was paid through June 9.  The entire remaining $58.4 was paid In the last three weeks of June.  Not very helpful!

But could corporate income tax payments still be useful as a much more timely Quarterly report?

In the last several year we had a dip and then a rebound in corporate profits:

Will Q2 profits continue to rebound, and maybe even set a new high?  To see if income tax payments would give helpful lead time, the first thing I did, because of seasonality, is to compare the data YoY. So here is the same information above re corporate profits as a YoY% change:

YoY corporate profits were positive through Q4 2014, and bottomed in Q4 2015 before turning positive again in Q3 2016.

So I checked this against the total Quarterly corporate income tax payments from the Daily Treasury Statement.  The below chart shows the results, with income tax receipts YoY% change on the left, and the YoY% change in corporate profits in parentheses on the right:

Q4 2014   +32.6   (+2.4)

Q1 2015   +0.5   (-1.3)

Q2 2015   +5.4   (-4.0)

Q3 2015   +3.5   (-8.4)

Q4 2015   -8.5   (-19.7)

Q1 2016   -3.6   (-5.3)

Q2 2016   -15.4   (-1.7)

Q3 2016   -13.1   (+4.3)

Q4 2016   -7.9   (+22.3)

Q1 2017   -36.1   (+11.5)

Q2 2017   +15.2   (N/A)

Income tax payments did not turn negative until 3 quarters after profits. They bottomed YoY 2 quarters later than profits, and turned positive again 3 quarters later as well.  It also appears that corporations engaged in some heavy-duty accounting gimmickry in Q1 of this year, likely delaying realization of income in anticipation of a big tax cut!

So using corporate tax payments to anticipate quarterly corporate profits is an idea that doesn't work out. But being a nerd and following the data is why I am neither a Doomer nor a Pollyanna.


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