Long ago and far away, I learned how to forecast credit numbers by an old hack at Citi named Leroy Washington. Before working at Citibank, Leroy worked for the City of New York, similar to many other long-time Citibankers in the ‘70s and ‘80’s. Leroy was a nice, wise old man who also managed expense control when young banking officers filed expense reports manually and never looked down at you when you had a dumb question about tightening your credit forecasts which were out of his realm. But, don’t make the same mistake twice because that meant you didn’t listen the first time.
Linear regression always worked, but there were some rules that always had to be built in. A few seem like no-brainers, others were learned by people older and wiser than me, at least back in 1980. Credit portfolios swelling during the winter holiday months is not rocket science, but tweaking the numbers based on how many Fridays were in the month was enlightening to me at the time. Another factoid: expect better results as tax refunds hit people’s accounts in the April-ish time frame.
This analysis by the JPMorgan Chase & Co. Institute nails the tax refund forecasting hack. Although the Chase Institute is owned by mother-Chase, they have the luxury of independence with well-funded parents, and access to data which would make an economist drool Here is a link to the latest report.
The story begins:
- Every spring more than a half trillion dollars flow into and out of the financial accounts of American families as they reconcile taxes paid against taxes owed for the prior year.
- Most of these flows–representing 2.5 percent of the year’s total GDP–hit families’ financial accounts during the dozen weeks of the traditional tax season from mid-February to mid-May.
- Our findings underscore that fact that, whether by design or not, the tax system is a primary tool by which many families generate lump sums of cash.
The Institute has six findings on the implications of tax refunds to household budgets; Leroy would be proud.
- Four-fifths of our sample received one or more refunds and made no payments. Refund recipients tend to have lower average incomes and smaller cash buffers than those making tax payments.
- Tax refunds amount to almost six weeks’ take-home income for the average family receiving them. For families making a tax payment, the average payment is equivalent to 2.5 weeks’ income.
- Among tax refund recipients, average expenditures increase sharply as soon as the refund is received.
- Expenditures on durable goods, credit card payments, and cash withdrawals increase most sharply upon receipt of a tax refund.
- Families for whom the refund has a larger cash flow impact increase their spending and saving most sharply when it arrives.
- On average, families who make a tax payment cover that payment with cash already available when it is due.
And, with five weeks away to filing your own taxes, a memory from the Beatles.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
