By Kate Davidson 

WASHINGTON -- Many economists expect last week's expiration of $600 in enhanced weekly unemployment benefits to lead to a sharp drop-off in household spending and a setback for the U.S. economy's near-term recovery, even if the lapse turns out to be temporary.

The federal government was providing billions of dollars a week in extra jobless payments to workers -- more than 12 million people in mid-July, the Labor Department said. The program, approved as part of a coronavirus aid package, expired at the end of July, and Congress and the White House remain at odds over how to extend the benefits.

The payments, economists say, allowed consumers to pay rent, utilities, car loans and credit-card bills, protecting the economy from the cascading effects of a sudden drop in consumer demand as the coronavirus pandemic swept across the U.S.

"It could take weeks and weeks and weeks to get this money to people, which means of course they will default on a number of obligations," said Trevon Logan, an economics professor at Ohio State University.

The average unemployed worker in the U.S. earns a little more than $300 a week on traditional jobless benefits. That isn't enough for many people to keep up with routine bills, Mr. Logan said. Missing those payments could trigger evictions, fines and late fees -- costs that consumers will try to avoid by pulling back on other kinds of spending, he said.

Democrats and most Republicans, including President Trump, have said they want to resume the payments as part of a broader fiscal relief bill, which could also include another round of stimulus payments and aid for state and local governments. But they have yet to agree on how large the payments should be and how they should be structured.

Republicans want to shrink the payments to $200 a week, arguing $600 discouraged workers from returning to jobs and was holding back the labor market recovery. Studies have found many workers were taking in more in jobless aid than their prior pay, but economists say they haven't seen evidence the assistance was affecting the rate at which people are returning to work.

Democrats have said the $600 payments are essential to keeping households afloat and cushioning the broader economy, with the unemployment rate in double digits and a summer surge in coronavirus cases.

Economic data have shown the more-generous unemployment benefits have played a key role during the pandemic in supporting consumer spending, which accounts for roughly 70% of economic output.

Despite a historically high unemployment rate, household income in June was above the level it was in February, before the pandemic had spread widely in the U.S., according to the Commerce Department. The increase in unemployment insurance payments, including the extra $600 a week, more than offset the decrease in wage and salary income.

The National Multifamily Housing Council said nearly the same share of renters made payments in June -- 95.9% -- as they did a year earlier, when unemployment was near a 50-year low.

In normal times, spending by unemployed workers typically falls about 7%, because benefits only replace a fraction of their wages. Since Congress authorized the enhanced payments in March, spending among laid-off workers climbed 10% from before the pandemic, while aggregate spending among people with jobs fell 10%, researchers at the University of Chicago and the JPMorgan Chase Institute found. For every dollar in jobless benefits, unemployed workers spent 73 cents immediately, the study showed.

"If we went to a world with no supplement, we'd see spending of the unemployed fall," said Peter Ganong, a University of Chicago economist and one of the study's co-authors. "Because there are so many unemployed people right now, that would have a really dramatic effect on the macroeconomy."

Mr. Ganong co-wrote an earlier paper that found the $600 payments had led to 68% of benefit recipients' earning more in jobless benefits than in their previous jobs, with the median worker receiving 134% of their prepandemic wage. Republicans have cited the study to support their argument that the benefits need to be scaled back.

Mr. Ganong and his co-authors estimate that letting the payments completely lapse would cause aggregate spending to fall 4.3% in one month -- greater than the decline seen during the 2007-09 recession. Shrinking the weekly benefit to $200 would result in a 2.3% spending drop, and setting it at $400 would lead to a 1.4% decline, they estimated.

Proponents of shrinking the payments have said some of the expected spending decline would be offset in the next bill by an additional round of stimulus payments, which Democrats and Republicans both support.

Mark Zandi, chief economist at Moody's Analytics, said stimulus payments don't provide the same "economic bang for the buck" as enhanced unemployment insurance.

"UI beneficiaries spend every penny of the support very quickly on necessities that generate other economic activity and jobs," he said.

If the payments aren't reinstated, it could end up costing the economy 1.1 million jobs by the end of the year, boost the unemployment rate by 0.7 percentage point and reduce gross domestic product by 1.27%, according to Mr. Zandi's analysis. If the payments continue at $200, Mr. Zandi said the effects won't be much better: He estimated it would lead to one million lost jobs and a 0.6 percentage point increase in the jobless rate.

--Sarah Chaney contributed to this article.

Write to Kate Davidson at kate.davidson@wsj.com

(END) Dow Jones Newswires

August 05, 2020 10:14 ET (14:14 GMT)

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