Two Charts Which Should Influence the Discussions in Washington

As noted in a post last week, the growth in federal collections, which given the pathetic lows established during 2009 has been decent but not exceptional during the past year or so, slowed down in June. In fact, June's total collections of $249.7 billion trailed June 2010 by about $1.4 billion (before adjustments explained in the next paragraph). By contrast, April 2011 came in 18% ahead of April 2010.

To fairly evaluate the strength of the economy, it has become important to separate what the government is taking in as a result of economic activity from what it is taking in because Fed Chair Ben Bernanke has ramped up his electronic money-printing operation. After subtracting “Deposits of Earnings by Federal Reserve Banks” from both June 2011 and June 2010 ($8.3 billion and $6.8 billion, respectively), we're left with receipts from economic activity of $241.4 billion and $244.2 billion. (Context: During the Bush 43 years, when interest rates were somewhat higher, related Fed receipts were about $3 billion per month. During the current fiscal year, they're on track to hit $90 billion by year's end, or about $7.5 billion per month.)

The first chart shows 12-month trailing receipts going all the way back to September 2007 (figures incorporating months during 2008 and early 2009 treat the Bush 43 IRS stimulus payments as outlays instead of as negative receipts, as the government incorrectly did):

June 2011 marks a significant level-off — actually, make that a drop-off. It is much more significant than the one seen in March 2011, as will be explained in the next paragraph.

To tune out some of the noise, the second chart, which compares receipts from economic activity to the same month of the previous year, looks only at receipts during five calendar months: January, April, June, September, and December. That's because these are by far the heaviest months for federal collections, and are the best indicators of where collections are really headed. The first four identified months represent when federal quarterly estimated tax payments are due from individuals and regular corporations. December is important because many taxpayers need to get their payments in before the end of the calendar year to avoid penalties. Especially in the flat employment market we've endured during the past two years, the collections bumps or declines which occur in these months are there largely because of changes in federal tax payments made by the nation's individual and corporate wealth and job creators.

So here is the second graph:

Yikes. Year-over-year collections during these five key months made a comeback to a decent rate by the middle of last year and remained decent after that (only decent because the bounceback after such steep declines should have been much greater, and would have been with the right fiscal policies), with April's aforementioned 18% increase representing a high-water mark. June 2010 brought an abrupt end to that.

Translation, when combined with (to name just a few) disturbing employment news, dropping consumer confidence (at the lowest level since March 2009), and sharply reduced GDP forecasts: The economy is seriously slowing down. Unless the goal is to keep it slowed down, the last thing that needs to come out of the current debt-ceiling negotiations would be tax increases, especially on wealth and job creators who are already starting to bail and who instead need to be given a reason to stay in the game.

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UPDATE: “Totally unrelated” news which couldn't possibly have anything to do with the overall state of the economy (company press release here) –

Cisco to reduce work force by 9 percent in cost-cutting effort, will take $1.3B charge

Networking equipment maker Cisco Systems Inc. is cutting 6,500 employees — about 9 percent of its work force — as it follows up on a plan announced in May to eliminate thousands of jobs to reduce costs and raise profits.

Cisco, which has about 73,400 employees worldwide, said Monday that it was laying off 4,400 layoffs people. Another 2,100 employees chose to leave as part of an early-retirement program. The company said the cuts include the elimination of 15 percent of its employees at and above the level of vice president.

Cisco said the cuts will cost it $1.3 billion in severance and termination benefits. The company plans to take the charge over several quarters. It will take $750 million of that, including $500 million for the early-retirement program, during the current quarter.

Cisco will inform employees who have been cut in the U.S., Canada and some other countries during the first week of August.

Given that Cisco was considered THE bellwether stock of the late 1990s, this is at the very least a devastating symbolic development.