Posted on November 6, 2025
We have now observed two consecutive months with significantly reduced growth in federal tax withholding. Such withholding–the combined amount of income and payroll taxes withheld from workers’ paychecks and remitted by employers as quickly as the next day to the U.S. Treasury–grew by an estimated 3.8 percent in October following a very similar 4.2 percent in September, both compared to the amount from the same month in 2024 (see the chart below). Growth had been in the range of 6.4 percent to 6.9 percent from June to August. Indeed, the latest two-month average of 4.0 percent growth is the lowest two-month average since the first part of 2023. Because wages and salaries are a key determinant of the amount of tax withholding, we expect that the slowing growth in withholding tracks slowing growth in wages and salaries in the overall economy; the two measures track each other over long periods of time, after we adjust the withholding amounts for tax law changes and changes in the monthly calendar.
We first observed the slowing of withholding growth in September, before the government shutdown began in October. Nonetheless, the shutdown is now doubtlessly playing a role, presumably along with a more general economic slowing. The shutdown is casting a wider and wider net, as transportation, food assistance, and other parts of the economy become involved.
With releases of government economic data delayed by the shutdown, we are left to look at private sector economic indicators, of which there are many. We are honored that for the past five years or so, our measure of federal withholding growth has been one of the 10 underlying series incorporated into the “Weekly Economic Index” published by the Dallas Federal Reserve Bank. When the shutdown finally ends, we will be able to again compare our measure of federal tax withholding growth with the government data series on wages and salaries. It is unclear, though, how available or reliable some government data will be for the period during the shutdown itself.
