Surging Federal Expenditures, Collapsing Tax Revenue…These Are Not Signs Of A Strong Economy

Authored by Chris Hamilton via Econimica blog,

Typically in times of strong economic activity, tax revenues rise and federal government spending is flat or even declines.  Times of economic weakness (usually recognized as recessions) see the opposite.  The chart below shows the year over year change (quarterly basis) in Federal Government expenditures (blue line), federal tax revenue (black line), and household net worth (yellow columns), plus shaded areas are recessions.  The current period of surging federal government expenditures, collapsing tax revenues, amid surging household wealth is “unique”.

Focusing on the 1970 through 1994 period, the chart below shows the interplay of goosing federal spending while tax revenues (and economic activity slow).  This is typically also associated with periods of declining or low growth household net worth.

Focusing on 1995 through Q3 of 2018, chart below details the surge in federal spending, tanking tax revenues, coincident with declines in household net worth…until now?!?  2011 to present is the period with the greatest wealth creation growth in the nations history, yet during this period of economic strength, growth in federal tax receipts has been consistently decelerating…and even prior to the Trump tax cuts had already turned negative.  Since the tax cuts, tax receipts are collapsing while federal spending is surging…hallmarks of what typically takes place during a recession, not the greatest wealth creation in this nations history.  The federal government is already red-lining stimulus…before a slowdown or recession has even officially begun.

Now the economy is cooling, the Fed is likely to cease rate hikes, likely to slow or even cease “normalizing” its balance sheet (despite the balance sheet still being over 5x’s the size of the pre-GFC balance sheet).  Growth in federal spending is likely to continue accelerating and tax receipts continue declining.  Negative interest rates and more QE are certainly good likelihoods.

The already swollen issuance of public (marketable) debt since 2007 is about to move from a steep angle to an exploding vertical upward trajectory.

The much feared debt crisis is directly ahead exactly as the demographic driven crisis hits full force.  Charts below detail the working age population growth vs. 65+yr/old populations from 1966 through 2030.  Note the highlighted areas from 2018 through 2030 of minimal growth in the working age population versus the mushrooming of the 65+yr/old population.

65+ year olds, chart below.

Simply put, from 2018 through 2030:

  • 15-64yr/old population +4 million persons, primarily derived from anticipated immigration (with 75% Labor Force Participation rate)

  • 65-74yr/old population +8 million persons (27% LFP)

  • 75+yr/old population +12 million persons (8% LFP)

For quick reference, the chart below details the average income, expenditures, and labor force participation (highlighted boxes) by age of the head of household.

Even more simply put, 73% of the 65-74yr/old population growth and 92% of the 75+yr/old population growth will move directly into the “not in labor force” categorization (detailed HERE) while the potential for further growth in employees tanks (detailed HERE).  And as immigration (legal/illegal) continues decelerating, some or all the estimated working age population growth will disappear.  But this is far larger than just the US, as the huge deceleration in growth of global energy consumption is telling us (detailed HERE).

Get ready, the sum of a whole lot of bad policies and broken systems are about to, very sadly, come to fruition.