Tax revenues levied directly from American payrolls are sending a better message than certain confidence indicators suggest. According to the latest TaxTracking bulletin, year-on-year growth in federal withholdings at source reached 6.4% in May, following 4.0% in April and an average of 5.4% between January and March. These withholdings correspond to income taxes and social security contributions deducted by employers from paychecks and subsequently remitted to the US Treasury.

The indicator's value lies in its high frequency and its direct link to total payroll. Measured in nominal dollars and on an aggregate basis, it captures shifts in employment, hours worked and hourly wages simultaneously. This series also offers the advantage of being available quickly, relying on actual tax flows collected, and directly measuring the aggregate trend in labor income, whereas official data arrives with a longer lag and is frequently subject to revisions.

TaxTracking estimates that the average growth for April and May, at 5.2% year-on-year, remains consistent with wage income rising faster than inflation and a US economy that continues to expand despite the headwinds accumulated this year. This reading warrants some nuance, however, as part of the May acceleration could stem from a calendar effect related to Memorial Day, which fell on its earliest possible date this year.

The next health check for the labor market will come this Friday with the official employment report from the Bureau of Labor Statistics (BLS), which will reveal whether this leading fiscal signal is reflected in job creation, wage growth, and average work hours.