While markets remain on edge over the sudden tension between the Treasury and the Fed, following Mnuchin’s surprise notice to Powell that the Treasury would let 8 of the key 13(3) “emergency” programs currently in place (including the critical for the bond market Corporate Credit facilities, PMCCF and SMCCF) at the Fed expire on Dec 31…
… which also threatens the continuation of Helicopter Money into 2021 as the only reason the Fed has been able to monetize all US issuance this year while sending stocks soaring has been the close cooperation between the Fed and Treasury, another, more important “expiration” will take place on Dec 31, and will likely have far more profound consequences for the broader US population.
Here’s why: on Dec 31 is when many of the key provisions in the CARES Act are set to expire if there is no action from Congress. All else equal, some 12 million American will likely lose access to their Emergency unemployment benefits activated in the aftermath of the covid pandemic, which alone could be a drag of up to 1.5% to growth in 1Q according to Bank of America. Additionally, the concurrent expiration of eviction moratorium, mortgage forbearance programs, and suspension of student loan payments could all be headwinds early next year, creating further obstacles.
The CARES Act expanded unemployment insurance eligibility and duration during the pandemic. Of this, the Pandemic Unemployment Assistance (PUA) program was the largest component, giving unemployment benefits to workers who are normally ineligible for regular state UI programs such as contract and self-employed workers. The PUA gave these workers 39 weeks of unemployment benefits. Meanwhile the Pandemic Emergency Unemployment Compensation (PEUC) program provided 13 additional weeks of benefits to those that exhausted regular state UI benefits. These programs will expire on December 26th.
According to the latest DOL data, there are currently over 21 million unemployed workers receiving UI benefits of which 13.6 million are enrolled in either PUA or PEUC; these are shown in red and green in the chart below.
According to analysts at the Century Foundation, roughly 12 million workers enrolled in PUA or PEUC will see their UI benefits cut off at year-end, and based on BofA calculations, this would roughly translate into an income shortfall of $39BN in 1Q if these workers are unable to find work or alternative income support. BofA also calculates that based on its work on fiscal multipliers, income loss of $39BN would translate into a 1.2% hit to growth on an annualized basis in 1Q 2021.
Beyond the direct hit to those losing their benefits at year-end, many that are currently on regular state UI programs will exhaust their eligibility and be left without a safety net. A back of the envelope calculation suggests an additional 2.4MM workers who are currently on regular UI benefits will exhaust all available UI resources by 1Q of next year, which would amount to roughly an $8BN income loss or a drag of 0.3% to growth.