We received more confirmation this week that consumer spending bounced back strongly from its April lows.
The $1,200 checks that were sent by the Federal Government to individuals certainly helped create the conditions for this reopening spending revival, but I would argue that expanded and supplemented unemployment insurance benefits have been much more targeted and effective in maintaining spending among the most vulnerable households.
One of the pillars of the Cares Act that has been very effective in supporting the recovery in retail sales and consumer spending over the past three months is expiring today.
The Pandemic Unemployment Compensation program provides an additional $600 per week in unemployment benefits to people already collecting regular state unemployment benefits and the millions more that wouldn’t normally be eligible for unemployment insurance such as business owners, self-employed workers, and independent contractors under the Pandemic Unemployment Assistance Program.
There are still over 30 million Americans receiving regular state and federal employee unemployment benefits and pandemic unemployment assistance, according to the Department of Labor.
The expiration of this supplemental pandemic unemployment compensation, even if temporary, while Congress haggles over the terms of any extension, will have a measurable economic cost. The loss of benefits is expected to total around $10 billion a week and amount to around $90 billion by the end of September. Unemployment benefits for the average person are expected to drop by about 65% after July 31st from $921 per week to $321 per week. The new weekly benefit amount varies to some extent by state due to differences in state unemployment insurance programs.
Economists widely agree that the loss of these supplemental pandemic unemployment benefits has the potential to do even more damage to our already teetering labor market. Estimates vary as to the ultimate negative impact of jobs and unemployment, but between 1 and 5 million jobs could be at risk if these benefits were allowed to permanently expire and the unemployment rate would be at least 0.6 percentage points higher at the end of the year than it would be otherwise if the benefits remained fully intact.
The impact on retail sales could be equally troubling. Already the shine from the June economic data is starting to tarnish in July. Consumer confidence is falling again according to both the Conference Board and University of Michigan surveys, and August could be even more challenging for robust retail sales gains. This is especially true, if Congress dithers in passing another coronavirus economic relief act with generous supplemental unemployment benefits left largely intact.
Bottom line: The economic recovery has progressed faster than we forecast back in May, but that has largely been due to the generous income and unemployment insurance support of the Federal Government during the depths of the coronavirus shutdowns.
With virus cases on the rise in much of the country, and states pausing and rolling-back their reopenings, now is not the time to get overly confident in the sustainability of the economic recovery. More generous taxpayer support will be required to keep the economic recovery on track and supplemental unemployment benefits need to remain a pillar of that support.
To find out more, check out this week’s U.S. Outlook Report.
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Like a mid-summer thunderstorm approaching from the West, dark clouds are beginning to build on our economic and financial horizon yet again.
It’s still too early to know whether we will be hit by an imminent downpour or not. A last minute economic rescue package in the $1 to $2 trillion dollar range from Congress before the end of July could help keep the storm clouds at bay until the end of the year, but the increasing virus case count is already doing some material damage to the pace of the economic recovery in my opinion.Read More ›
Despite unprecedented job losses in a wide swath of industries across the country since the COVID-19 pandemic arrived in the U.S., home price growth has unexpectedly accelerated.Read More ›
The June employment report came in on the hot side, beating most economists’ forecasts. The U.S. economy added another 4.8 million jobs in June on top of an upwardly revised 2.699 million jobs created in May. The better than expected job gains were likely driven by the reopening of big states like California that didn’t really begin opening up until late May and early June.Read More ›