Aug 12, 2020 - Economy

U.S. already feeling effects of ending unemployment benefits

An unemployment line

Hundreds of unemployed Kentucky residents wait in long lines outside the Kentucky Career Center for help with their unemployment claims on June 19, 2020, in Frankfort. Photo: John Sommers II/Getty Images

Congress' failure to renew enhanced unemployment measures at the end of July is already showing up in consumer spending patterns, holding down retail purchases and foot traffic, economists at Deutsche Bank say.

What happened: The reduced spending aligns with the expiration of the Federal Pandemic Unemployment Compensation benefits, which provided an additional $600 per week to qualifying unemployed individuals.

  • By mid-June spending by lower-income households had normalized, outpacing spending recoveries for middle- and higher-income consumers thanks to the unemployment benefits, the economists noted.
  • But by the end of the month, consumer spending fell more for lower-income households than others, "no doubt impacted by the sharp decline in unemployment benefits."

Why it matters: "The evaporation of these benefits highlights near-term downside risks to consumer spending, particularly for lower-income households, which have been a critical engine of the recovery despite being disproportionately more likely to lose a job during the pandemic — a testament to the effectiveness of the income supplement."

Major key: Google mobility data indicate that since the end of July foot traffic around retail has declined by more in states that were more likely to be affected negatively by the expiration of unemployment benefits.

Between the lines: Despite President Trump's executive memo extending $400 a week (now looking more like $300/week) in unemployment benefits, "legal, administrative and fiscal uncertainty remains."

A recent study published by the National Bureau of Economic Research found that eliminating the enhanced unemployment benefits would lead to a 44% decline in local spending.

  • Cutting it to $200 would mean a 28% decline in spending.
  • Reducing to $400 would cut spending by 12%.
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