There’s been a lot of debate on further unemployment stimulus. Now academics have crunched the numbers. Pairing real-time credit card spending with government records on unemployment benefits gives a clear view of the impact of stimulus on the economy. All else equal, a big drop in consumer spending may be on the cards as unemployment benefits taper off. Though a strong Q3 economic rebound may be sufficient to mask the impact.
The data comes primarily from the state of Illinois where researchers obtained granular unemployment data. This was then combined with detailed data on credit card spending. Prior research suggests that granular data on individuals is valuable. This is because unemployment and unemployment benefits impact people quite differently depending on their specific situation.
Hand To Mouth
For example, some households live financially ‘hand to mouth’ needing to spend every dollar that comes in without any savings to speak of. For these households, unemployment is understandably, a major and instant shock to spending.
In contrast, for households with savings or multiple incomes, the impact of unemployment on spending can be more muted, or at least delayed. The type of unemployment matters too. Spending patterns can be less impacted if another job is likely on the cards, but if unemployment is deeper and another job is less likely then the spending impact can be intensified. These variables are much easier to explore with detailed individual data rather than examining broad averages.
The net result is the impact of enhanced unemployment benefits stopping at the end of July, would cut consumer spending by around a quarter, all else equal. As a rule of thumb consumer spending is around two thirds of economic activity, so this matters to the broader economy.
The full paper by the National Bureau of Economic Research can be found here. Now there are two important caveats to that finding. Firstly, even though a full stimulus deal has not been reached after the CARES Act expired, the Lost Wages Subsidy has provided an extra $300 a week for several weeks in many states. That too now looks to be ending, but has likely smoothed the impact on consumer spending relative to forecasts of complete removal.
Secondly, the forecasts only show the impact of reduced unemployment payments, which are a clear negative. However, there are positives as unemployment has declined over recent weeks and economic life has begun to recover relative to the lows from earlier in 2020.
As such, the absence of unemployment stimulus is likely a major drag, but other economic positives can offer some offset. For example, current estimates have US GDP up 20%-30% in Q3 suggesting that the bounce from the extreme economic lows of Q2 has the potential to more than offset the tapering of elevated unemployment benefits, at least over the short term.
So there are reasons for the markets to be concerned if no more stimulus is coming. However, this may be circular, a negative market reaction could bring lawmakers back to the negotiating table.
Also, there far more significant moving parts in the economic forecast than usual. This means that even a big blow to consumer spending may be more than offset by other elements of an economic rebound, and currently a big rebound, in aggregate, appears likely for Q3.