Lost Benefit Analysis

It's Only Temporary

The government has implemented various enhanced unemployment benefit programs throughout the pandemic to provide financial support to households. There was broad consensus that the social safety net needed to be strengthened in the immediate wake of the pandemic, when over 20 million people suddenly found themselves out of work. These programs have extended benefits beyond the traditional 26 weeks offered at the state level, provided benefits to those who do not qualify for traditional benefits (i.e., self-employed workers) and offered a supplemental additional amount (currently $300/week) to anyone collecting benefits, see the table for more detail.

More than a year in, there is less universal agreement about the necessity and the extended duration of these programs. Someone who became unemployed at the start of the pandemic last March could still be collecting unemployment benefits today, and in about half of the states, those individuals could still be receiving a supplemental $300/week. With the outcry for workers today among businesses, this has sparked a debate over whether enhanced benefits are preventing a more robust return to work. While all enhanced benefit programs are set to expire on September 6, around half of all states have announced an early termination of the Federal Pandemic Unemployment Compensation (FPUC) supplement of $300/week.

The dwindling of benefits over the next few months will influence individual household positions, and also has implications for total personal income in the United States. In this short note, we discuss the drag expiring benefits will have on personal income in the months ahead and the implications for consumer spending.

Looking Past the Expiration Date

Total personal income in the United States totaled roughly $1.7 trillion in July (for purposes of this analysis we will reference all dollar values in non-annualized terms). The largest share of personal income is employee compensation, accounting for about 60% of the total. In normal times, unemployment benefits are an inconsequential factor for total income, representing less than a half of a percent of the total. But the extraordinary amount of people collecting benefits in addition to benefits being greater due to the enhanced programs, means unemployment benefits have caused some wild swings in income in recent months, and will have a direct bearing on the trajectory of income as they expire.

Unemployment benefits added a whopping $32 billion to personal income in July; that is nearly 2% of the total. While this is already lower than the 7% share benefits contributed at the peak last summer, it is still well above pre-pandemic norms. With roughly half of states ending the FPUC at varying times, the share of unemployment benefits will continue to drop over the next couple of months. The large declines, however, come once all enhanced benefits expire in September. Once that has occurred, jobless benefits will add just $3 billion to personal income or about one tenth of the dollar amount it added in July. In short, benefits as a share of income will only amount to about half a percent, a figure more in line with its normal, pre-COVID share. In addition to the expiration of benefits, PPP funding received by sole proprietors during the pandemic is also rolling out of the personal income estimates, providing another drag on overall income through September.

There are offsetting factors such as rising wages and one-off boosts from signing bonuses and other incentives from the private sector that will cushion the blow, but notably not all of the direct help from the government is going away. The Child Tax Credit (CTC) which is being sent to households is set to add about $15 billion to personal income per month, which should offset about 60% of the lost unemployment benefits.

Still, barring an unexpected surge in employee compensation, the increases in various other categories of personal income will not be enough to offset the hit from jobless benefits going away. The overall trajectory of income growth will likely be flat to slightly down over the next four months or so as a result (see chart).

Once stimulus rolls out of the income calculations, we expect income growth to settle on a more normal upward trajectory. While we look for personal income to be around 1% lower by October than where it was in July, and by the end of the year, income will be 0.6% higher.

Dwindling stimulus should therefore not be a significant drag on consumer spending. It was the fiscal support in the form of jobless benefits and economic impact payments that shored up personal income and propelled consumer spending throughout the pandemic. And although we won't have the “pennies from heaven” moments like last year, a steady rise in income via wages and salaries should sustain consumer spending going forward. We forecast personal income to remain moderately above its pre-pandemic 2010-2019 trend, which suggests income is pretty much where it would have been in the absence of the pandemic. Squaring this solid income trajectory with elevated personal savings and the rise in net worth across income cohorts suggests households remain in a relatively healthy financial position to spend. Whether they have the desire to do so is a different story, and rising COVID case counts and the accompanying pullback in some high-frequency measures of spending suggest some renewed caution among consumers.