Conclusion: The unemployed face a significant headwind in expiring benefit support with the scheduled expiration of the EUC and EB programs come November 30th. With roughly 5M people on the rolls of Normal, Emergency & Extended benefits at an average weekly compensation of ~$300, government transfers via unemployment benefits provides ~$7B in support on a monthly basis. Nearly half of that government-sponsored economic demand stands to be lost in the months immediately following the expiration of EUC & EB Benefits.
Position: Bearish on U.S. Equities; Bearish on Muni Bonds.
A key caveat to our 4Q10 Macro Theme “Consumption Cannonball” is that the transfer from government-sponsored consumer demand to privately-supported consumption will be shaky at best. On November 30th, that transfer will see its next meaningful test. According to a joint-report by the Center on Budget and Policy Priorities (CBPP) and the National Employment Law Project (NELP), roughly 2 million workers are set to lose unemployment benefits at the end of the month, with incremental monthly follow-through to the tune of “several hundred thousand workers”, barring Congressional extension of two key programs (EB and EUC) in a lame-duck session which starts today.
The structure of unemployment benefits is often presented in an unnecessarily complicated fashion. Below we provide a coherent overview of the unemployment benefit structure along with the lead estimates for beneficiary roll-offs as we move past the November 30th program expiration date.
- Within the standard Unemployment Insurance system, roughly 400,000 workers will exhaust their regular 26 weeks of benefits alongside the November expiration with no chance of tapping additional emergency benefits for individuals in all but 10 States. 455,000 unemployed workers exhausted their 26 weeks of regular benefits in September without finding employment and several hundred thousand more are estimated to exhaust their regular benefits each month of the coming year.
- The Emergency Unemployment Compensation (EUC) (enacted in 2008 & expanded via ARRA2009) has provided additional weeks of support for the unemployed. Roughly 800,000 workers stand to lose benefits here come December as the program expires.
- The Extended Unemployment Benefits (EB) provide support beyond that provided under EUC. An additional ~800,000 workers stand to lose benefits here on December 1st, as full federal funding for the program expires.
Understanding the roll-off requires comprehension of three key benefits programs. We explain each of these unemployment benefit buckets individually below:
1) Existing Unemployment Insurance: Workers in every state are eligible for 26 weeks of benefits. This compensation is fully-funded by the state. This is an easy one.
2) Emergency Unemployment Compensation (EUC): Benefits under EUC were provided for under the temporary Federal Emergency Unemployment Compensation program in 2008 and expanded under ARRA2009. EUC benefits vary according to the level of State Unemployment:
- State employment less than 6%: Workers in States with aggregate unemployment less than 6% are eligible for 34 weeks of additional benefits under EUC.
- State Employment greater than 6%, but less than 8.5%: Workers in States with aggregate unemployment between 6% and 8.6% are eligible for 47 weeks of additional benefits under EUC.
- State Employment greater than 8.5%: Workers in States with aggregate unemployment greater than 8.5% are eligible for 53 weeks of additional benefits under EUC.
3) Extended Benefits (EB): Extended benefits were provided for under ARRA2009 and provide full federal funding for workers in higher unemployment states who exhaust both initial Unemployment Insurance and EUC benefits. The duration of EB compensation is also tied to the level of state unemployment:
- State employment greater than 6.5%, but less than 8%: Workers in states with unemployment between 6.5% and 8% are eligible for 13 weeks of addition benefits under EB.
- State greater than 8%: Workers in states with unemployment greater than 8% are eligible for 20 weeks of addition benefits under EB.
Note: Extended Benefits (EB) arenormally half-state, half-federally funded. Not all states provide EB funding, although many changed state Unemployment Insurance laws to take advantage of the full federal funding provided under ARRA2009. See CBPP information document Here for more information.
Again, it is the EUC and EB benefit programs that are slated to expire at the end of the month. Workers exhausting their initial 26 weeks of unemployment insurance will no longer be eligible for extended benefits (37-53 wks depending on state employment level) under the EUC program. Moreover, workers receiving compensation under the EB program will be cut-off immediately in states that only provide support when the program is fully Federally funded. EB benefits will still be available in 10 states post the November 30th expiration.
With roughly 5M people on the rolls of Normal, Emergency & Extended benefits at an average weekly compensation of ~$300, government transfers via unemployment benefits provides ~$7B in support on a monthly basis. Nearly half of that government-sponsored economic demand stands to be lost in the months immediately following the expiration of EUC & EB Benefits.
In varying proportions, States General Funds source the bulk of their revenues from income & sales tax. With the labor market expected to remain sluggish, State tax revenues should remain under pressure as government sponsored consumption fades, consumers continue to delever, and wage inflation remains muted alongside continued excess capacity. Such fiscal headwinds combined with a $1 trillion pension, health care and retirement benefits shortfall, continue to have us bearish on muni bonds. We’ll follow up with a more in-depth update on state fiscal conditions tomorrow.
Christian B. Drake