Posted on January 30, 2024
Federal tax withholding–the amount of income and payroll taxes withheld from workers’ paychecks and remitted daily to the U.S. Treasury–is always hard to interpret in January, being affected by year-end bonuses on Wall Street and elsewhere, along with multiple holidays. Nonetheless, we estimate that withholding growth slowed significantly this January, when withholding amounts measured about 2.3 percent above the amounts from January 2023 (measuring so-called year-over-year growth). That is significantly lower than the growth of between 5 percent and 7 percent in each month from May to December 2023, and the average of 5.6 percent growth over that period (see the chart below). Those growth figures adjust the amount of withholding to standardize the makeup of business days across months (which can affect reported monthly totals significantly) and to remove the estimated effects of tax law changes that affect withholding but not wages and salaries (currently no such adjustment is needed). We will see if the slowdown in withholding growth will presage a slowing in other labor market indicators for January, or if it will be a temporary anomaly.
It’s hard to come to conclusions about the economy–in particular about the labor market and economywide wages and salaries–from January withholding because the amounts tend to be more volatile than in other months. That volatility stems both from year-end bonuses as well as from the holidays that make it harder for us to measure withholding growth properly using our methodology that reduces the monthly noise that results from different calendars between months. There was also nothing unusual we observed about withholding in January 2023 that could lead to a correcting drop-off in withholding this January. Note that we can make estimates of withholding growth in January even before the month is fully complete, because our methodology does not derive reliable estimates in the last couple of days of each month; month-end withholding amounts, though not unusually large, contain too much noise.
