Skip to navigationSkip to content

Here’s a very, very good indication the US job market is heating up

By Matt Phillips

Believe it or not, this is one of my favorite economic indicators. It’s the US Treasury’s daily update on how much federal tax withholdings the department is pulling out of American paychecks. I know, I know. It’s a bit noisy. But if you slap a 50-day moving average on it and look at the year-over-year change, it actually seems to tell you something. The upshot? Federal income tax withholdings have surged lately. Now this can mean a couple things. It can mean that US wages are starting to pick up. It can also mean that there are simply more people with jobs who are getting pay checks. It can also mean the Federal government is just taking more money out of people’s paychecks. That’s what happened last year, when a US payroll tax holiday—a form of stimulus aimed at supporting economic growth—expired. That meant payroll taxes went up. But other analysts are looking at this data too. For instance Bank of America Merrill Lynch analysts built this chart on the same numbers. Their conclusion?

Federal withholding tax data – essentially, social security, Medicare, and federal income taxes paid directly from wages and salaries – have increased substantially in the last few months. The underlying increase in wages and salaries indicates either an increase in the numbers of employed persons, or an increase in cash compensation rates. So far, the evidence from the February employment report appears to suggest more of the former.