Financial FAQs
Because the deadline has passed to renew unemployment benefits enacted by the CARES Act, it looks like there will be no quick economic recovery in the fall. I am supposing the recovery could ultimately be shaped like a ‘W’—sporadic spurts of growth and declines in growth with new COVID-19 surges, given there is no coordinated national response to the pandemic.
And what about school openings when 60 percent of the major elementary school districts will have at-home schoolings this school year, according to a CNN survey, and no national guidance on what constitutes safe re-openings?
This has to be why Republicans are pushing for the full re-opening of schools, regardless of the dangers to children. It keeps at least one parent at home who isn’t working when they want to speed up the reopening of businesses.
The huge jump in consumer spending in May and June highlights what could have been if benefits had been renewed with the additional $600 per week boost to unemployment compensation, and which Republicans don’t want to renew.
The above Reuters graph highlights the record 7.1 percent boost given by the additional benefits since the CARES Act was implemented.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 5.6 percent last month after a record 8.5 percent jump in May as more businesses reopened, the Commerce Department said. But most of the spending was due to the $600 boost to low-income service workers that tend to spend more of their incomes.
Consumers boosted purchases durable goods such as auto and appliances that last more than three years, as well as clothing and footwear. They also spent more on healthcare, dining out and on hotel and motel accommodation, though outlays on services remained lackluster because of caution sparked by the virus.
Q2 economic growth had plunged 32.9 percent because consumer spending fell minus -35 percent during this period. So growth will only recover when consumers feel safe enough venture out of their rabbit holes, I said last week. They will instead choose to save more—currently a huge 25 percent of their personal incomes vs. more normal 3-6 percent—and spend less.
That is why Friday’s upcoming unemployment report is so important. Dallas Fed President Robert Kaplan on Monday said he now expected an unemployment rate in a range of 9 -10 percent at the end of the year. Ten percent was the highest unemployment rate during the Great Recession when some 8 million jobs were lost.
The June unemployment rate was 11.1 percent and estimates are for July to show a 10.5 percent rate, according to an average estimate of economists. It took more than eight years, from October 2009 at the end of the Great Recession until March 2018, for the unemployment rate to drop from 10 to 4 percent, which is considered full employment.
How long might this depression last with today’s political polarization?
Harlan Green © 2020
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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