“Get to the Choppa!” Arnold Schwarzenegger, a national treasure if there ever was one, growled the line in that 1987 cinematic tour de force Predator. Aliens hunting soldiers, virus hunting people, analogies galore, who knew it was an instructional video for 2020? That same sentiment echoes through Congressional halls these days as our nation’s leaders negotiate the next round of stimulus. For them, “getting to the choppa” means saving themselves before the oncoming elections. Don’t come empty handed though because getting onboard means buying a ticket. House Democrats have led off by passing the $3T HEROES Act in May, whereas Senate Republicans have countered with the $1T HEALS Act. Now the messy negotiation begins.
The $2T difference between the competing bills can be broadly grouped into two categories: 1) state and local aid and 2) individual economic assistance. On the first point, House Democrats have proposed $1.2T of additional state and local fiscal aid to mitigate revenue short-falls from the COVID pandemic. The Senate bill, however, does not provide additional funds, and instead allows states to repurpose COVID specific funds under the prior CARES Act to offset lost revenue. Both bills do increase funding for state education expenses by ~$100B, so those funds should survive the negotiations. Nonetheless, there’s still a $1.1T chasm here, and the closer the Senate moves up to the House figure, the more state and local government jobs/programs Congress can help preserve.
The other $1T falls into the category of individual economic assistance. About 30% of the difference is related to the enhanced federal unemployment insurance (“UI”) and stimulus checks, whereas the remaining 70% is related to a basket of rental assistance, child care grants, student loan forgiveness and tax credits expenditures that House Democrat’s passed in the HEROES Act, but is absent in the Senate plan. Given there’s little agreement on the latter, we anticipate the final bill won’t include such expenditures. This leaves UI and stimulus checks. Both chambers agree on the economic stimulus payments, so you can likely count on an additional $1,200 stimulus check arriving soon. UI? Not so much.
UI is the political football. We’re referring to the widely discussed $600/wk of enhanced UI. Under the House plan, UI benefits will remain at $600/wk and expire in March 2021, whereas the Senate’s plan reduces UI to $200/wk and expire in December 2020. The White House and Senate Republicans contend that enhancing UI benefits disincentivizes the unemployed from seeking work because they’re collecting more in state and federal UI payouts than wages in their full-time work. Undoubtedly, there’s isolated cases of this, but on the whole the evidence isn’t compelling. Thus, the issue is likely more about political posturing than anything. The price difference between the two proposals? $300B. Since there’s broad agreement that enhanced UI is necessary, we’ll likely see a compromise and perhaps a “splitting the difference” for UI.
So why is this important? Well here’s where we stand on unemployment.
We’re at historical highs. After reaching an April high of 14.7%, we’ve since dipped to 11.1% as of June. Consensus projection for July would be an add of 1.5M jobs, which would see unemployment rates fall to 10.8%. Not horrendous numbers given the pause in state and local reopenings, but hardly a robust recovery. Initial unemployment weekly claims continue to number ~1.4M per week, still symptomatic of a very weak labor market.
Unsurprisingly, the spike in unemployment has resulted in a significant decline in personal income, which the stimulus and UI payments have helped cover in the past few months.
Personal income is annualized to smooth out seasonal distortions and make year-over-year comparisons easier. We can clearly see above how disruptive the COVID induced paralysis has been on the economy and personal income. Mass unemployment means personal income is down by ~$100B per month. Annualize that and it’s about $1-1.2T (4-5% of US GDP). It’s recovered somewhat from the April lows, but July figures will undoubtedly be weak given the COVID spread. Will this figure taper lower as we reopen? Certainly, but what happens from now until then? Who will support us? Think of the children!
Take a second look at the chart. The government is obviously the “payer” of last resort, bridging personal income until we can recover. Remember, consumer spending (personal expenditures) drives 70% of our economy, and personal income is the source for all such spend. Whether the House’s $400B figure is correct (i.e., $600/wk UI) or Senate’s $100B (i.e., $200/wk UI), it’s somewhere there, but much more likely on the high-side if employment doesn’t “V” shape soon. You can call it a handout or a bridging payment, but the reality is that the more we skimp on individual economic assistance (i.e., buttressing personal income), the more we’ll have to bailout the industries that consumers can no longer afford. Case in point, in the latest US Census Bureau Household Pulse Survey, 33% of renters responded that they had “no confidence” or “slight confidence” in paying next month’s rent. So we can either maintain individual economic assistance at sufficient levels to increase housing security, or be ready to federally backstop the loans on multifamily residences.
Regardless, the current UI enhancement has already expired, so even if Congress were to agree quickly, payments wouldn’t resume until September, leaving August exposed. By September though, the disbursement of new economic assistance could coincide with plummeting cases of COVID, which would give us a double-lift in September and into the year-end.
At least on the COVID front, we’re seeing some encouraging trends (positive cases are plateauing and hospitalizations are falling as we discharge more patients than admit).
So when do we reopen? Well some states (e.g., Republican leaning southern states) will likely begin lifting restrictions in August if COVID cases/hospitalizations continue declining. Blue states, such as California, will likely delay the reopenings until after Labor Day weekend as few governors would risk reopening too soon this time.
As for Congress? Well we anticipate a compromise on the UI issue at some midpoint between $200/wk and $600/wk. If a $1.5T bill were to pass (whereby the individual economic assistance payments were largely preserved, but state and local funding measures (except for education) were sacrificed), we wouldn’t be surprised. Electoral self-preservation always wins out with this group . . . time to get in the choppa.
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