• The Slowing Spigot of Government Relief

    The Slowing Spigot of Government Relief

    The Slowing Spigot of Government Relief

    “How weightless
    words are when nothing will do.”
    -Philip Levine, former U.S. poet laureate

    Last week was not a particularly data-heavy one in terms of high-impact information. Initial claims for unemployment remain stubbornly flat, refusing to improve. The government's "Job Opening and Labor Turnover Survey" showed that job openings fell in August for the first time in four months. Not a lot going on.

    By far the most important thing going on last week is stimulus plan negotiations, which were, by any stretch, volatile. First, President Trump tweeted on Tuesday that negotiations were off. That position was reversed throughout the course of the week, and by Friday, the president was calling for “a bigger stimulus package, frankly, than either the Democrats or the Republicans are offering” during a radio interview.

    It’s not at all clear what will happen with a new stimulus package. The problem might end up being that it’s already too late.

    It is difficult to understate how successfully the Coronavirus Aid, Relief, and Economic Security, or CARES, Act, patched up income through the second and third quarters. The chart below shows just how much the various programs have propped up disposable income, allowing households to keep paying rent and helping retail sales rebound.

    Even after the $600 benefit expiration, CARES Act benefits have been making up just under 5% of disposable income. If you imagine the average American taking effectively a 10% pay cut (beyond any existing pay cuts) since March, it’s clear that without the CARES Act, we wouldn’t be where we are today.
    Speaking of where we are today, let’s look at the CARES Act timeline.
    We’ve already passed some major deadlines, but we are approaching more:
    • July 31: A $600 unemployment boost expires.
    • Aug. 8: Deadline to apply for Paycheck Protection Program loans expires.
    • Sept. 23: Easier 401k withdrawal rules expire.
    • Sept. 30: Airline requirement to serve all routes expires.
    • Various third and fourth quarters: Extended $300 unemployment boost expires, depending on when state enrolled. Seventeen have announced funds have already run out.
    • Dec. 31: Pandemic Unemployment Assistance claims eligibility expires for self-employed and gig workers who don’t qualify for regular claims.
    • Dec. 31: Extended unemployment benefits programs the Pandemic Emergency Unemployment Compensation and extended benefits, expire.
    • Dec. 31: Deadline to apply for mortgage or rental assistance
    • Dec. 31: Student loan deferral period expires
    Look back at the chart above. The dark blue unemployment insurance boost is already gone. The yellow PPP loans have also expired. The rest of it goes away in two and a half months. That’s going to leave a large hole in spending power.
    Most notably, we are still seeing just under 15 million claims for the CARES Act unemployment programs each week. Incredibly, this is almost exactly half of all jobless claims. All of those benefits go away at the end of December, as currently stands.
    That is quite the cliff. We should mention, though, that unemployment benefits have already been expiring. The Pandemic Emergency Unemployment Compensation program extended regular unemployment an additional 13 weeks. After those expire, states with high unemployment are allowed to provide unemployed residents with extended benefits. As of last week, over 2 million unemployed workers are already on those extended lifelines. This number will continue to grow.

    One of the more interesting paradoxes of this recession has been the level of household confidence as we’ve progressed through it. It won’t surprise the reader to learn that household expectations of the future tend to dip during recessions. The same tends to be true of companies in the manufacturing and services sectors as well.

    We’re now seven months into the "Lockdown Recession." At this stage in the previous two recessions, in 2001 and 2008, households had a bleak outlook on the future. Their expectations in the Conference Board survey were well below the bottom 20% of readings in the history of the survey. Manufacturers and service companies were more optimistic in 2001, with roughly average expectations of the future, but in 2008 everyone was in the doldrums.
    As the chart below shows, everything is different in 2020.

    How is it that consumers can be this confident? Their outlook for the economy in September was quite optimistic. We say “was,” as September is already a long ways away in 2020 time, but regardless: Consumer economic expectations were in the 85th percentile last month. For a time of still highly elevated unemployment, that is astounding.

    Manufacturers, too, were extremely optimistic. July and August shipments of nondefense capital goods excluding aircrafts were, in fact, just below record highs, and still up 3% from a year prior.

    “If everyone is so optimistic, why is this column so gloomy?” you may be asking yourself. The answer is that the consumers and goods manufacturers can’t see the future. They are optimistic about tomorrow because they are being taken care of today. Consumers are being supported, and they are spending that money on goods.

    The clue comes from the service sector, which is clearly lagging. COVID restrictions continue to impact in-person services the most today. Survey respondents don’t have crystal balls. They project their current experience forward. Their current experience, without immediate amendments, is going to change.

    The Week Ahead …

    Next week, we receive sentiment data for small businesses in October via the National Federation of Independent Businesses' "Small Business Optimism Index," released Tuesday. Other early October data includes local Federal Reserve manufacturing surveys, provided by the New York and Philadelphia districts on Thursday. These indicators will likely show whether mixed stimulus talks have started to impact business confidence. Tuesday also includes an update on the consumer price index for September. This is expected to continue 2020’s noisiness, as demand for grocery and other household items has slowly cooled as other sectors return to normal. Shelter remains essential to long-term inflation metrics, likely to remain suppressed as calculated by rents, not home price appreciation. Even if inflation picks up somewhat, the Fed has signaled extreme patience, as the minutes from its last meeting released last week detailed a desire to see a modest overshoot above 2% target.