Limited Unemployment Benefits Can’t Bridge Stimulus Cliff

While stimulus talks remain deadlocked and party conventions take center stage, many benefits from the $3 trillion CARES Act have expired. It’s feast and famine. Stimulus for Q2 was historically large, but without another major stimulus measure, stimulus efforts for August onward are limited. Yes, the economy is broadly recovering and the recession may technically have passed. Still, it’s unclear how the economy and markets will fare over the long term without additional stimulus.

This is because despite a Q3 bounce, the road to full economic recovery could well take years if history is any guide. We’ll have a clearer picture on this trade-offs here in a few weeks as data for August, especially on personal incomes, comes in. Today’s consumer confidence data is one early, negative sign.

The Current State

Today we saw consumer confidence decline compared to July and remain at low levels. Less than 1 in 3 people expect business conditions to improve over the next 6 months. The logjam on stimulus could be contributing to that.

Stimulus Checks

The $1,200 stimulus checks, or Economic Impact Payments, that arrived in April for many aren’t currently scheduled to repeat. That’s despite apparent bipartisan support for them. The President, Democrats and Republicans have all signaled support for more checks, yet negotiations have stalled.

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The Paycheck Protection Program (PPP) too, offered major forgivable loans to businesses earlier in the year, but plans for renewal have stalled along with the stimulus negotiations. However, unemployment benefits are set to continue, albeit at lower levels than earlier in the year.

Limits To Unemployment Benefits

The one area where some progress has been made is unemployment benefit. Though even here it’s a slow process and funds may be exhausted shortly. FEMA funds have been allocated to unemployment benefits by executive order, but it’s taking weeks for recipients to see the cash depending on where their state is in the application process.

The additional $600 weekly payments ended at the end of July. Most states are still in the progress of applying for, and receiving, funds under the new measures which would be half the prior level at $300 a week for most states, and several states have yet to apply. South Dakota have said they won’t apply. Hence it could be a few weeks for additional unemployment checks to arrive. That delay matters for those who have lost their jobs and have limited savings. Hence the impact on consumer spending for August could prove material. Of course, businesses benefit from that spending, so how the markets fare remains an open question.

Limited Funds

Another major issue with unemployment benefits is that FEMA, which is currently allocating the funds, only has $44 billion. That may seem like a large amount of money. However, the CARES Act allocated six times that amount for unemployment benefits at $268 billion. It’s a fair bet that funds may run out on additional unemployment benefit payments, unless further action is taken on stimulus by lawmakers.

Data To Watch

Weak economic data may give the stimulus negotiations new life. Specifically the data to watch will be on the consumer. We know unemployment was over 10% for July, or almost 16 million people. We’ll see an August update on U.S. unemployment in early September. How the economy fares as the unemployment see a halving of their additional unemployment payments and delay in receiving the funds remains to be seen. Especially when April’s stimulus checks were spent weeks ago by many.

In Q2 we saw a bizarre situation where personal incomes rose in a recession primarily because of the twin effects of stimulus checks and large unemployment payments. In August we’re seeing an abrupt end to all that additional spending.

Yes, the underlying economy is rebounding as lockdown measures taper, so Q3 growth will almost certainly show a big bounce from Q2. However, the overall impact on the consumer remains to be seen given the stimulus spending has hit an abrupt cliff in August. This is because most CARES Act measures have ended, and the relatively small impact from executive action on unemployment insurance. August data on the consumer will be closely watched by both markets and lawmakers, today’s declining consumer confidence data doesn’t bode well. However, there is a Catch 22 here. If economic data and markets do weaken, perhaps more meaningful stimulus will be forthcoming.

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