One of the policies put in place to combat the rise in unemployment because of the lockdown measures used to limit the spread of COVID-19 was the Federal Pandemic Unemployment Compensation program. This program added $600 a week to unemployment provided by each state. The original program expired at the end of July. Congress was not able to come to an agreement on what should happen after July. As a result, President Trump implemented an executive order called the Lost Wage Assistance (LWA) program. This program will provide $300 a week to unemployment provided by each state but requires each state to contribute $100 a week. States can count benefits that workers are receiving from the state toward that $100 requirement. In other words, anyone receiving under $100 from the state will not be eligible for LWA. The LWA is set to run through December 27th and is funded from the Federal Emergency Management Agency (FEMA) for up to $44 billion.
Each state is required to apply for the LWA program to be granted approval. As of August 27th, 32 states had applied. Arizona was the first state to be granted approval and as of August 18th, Texas, Louisiana, Tennessee, and Missouri had begun processing payments and benefits that should be received the first week of September. It is unclear when the other states will begin processing payments, but it is estimated that it could take several weeks for the new program to be put in place. This means that the bulk of the payments will likely start to be received in late September or into October (the prior eligible payments may be retroactive).
The original federal enhancement to unemployment had a major impact on the consumer segments of the economy (income, spending, saving, confidence) and helped offset large losses in wages that resulted from record levels of unemployment.
Personal income coming from government transfers increased by record amounts because of the Federal Pandemic Unemployment Compensation program and still represented 17% of total personal income in July.
While the LWA program will be helpful, it will still act as a decline from the original $600. It is also a temporary program with a limited budget. At $44 billion and with roughly 25 million workers eligible for benefits, there is only $1,760 available for each person. At $300 a week, this would last just under six weeks. Many state unemployment programs are set up to last for 26 weeks. The peak in initial jobless claims was March 28th.
Six weeks from now would be 26 weeks from this peak and many workers could start to exhaust their regular state benefits. The result of this would likely lead many of those workers to apply for extended benefits (assuming states have the resources to extend them). They can also be covered by the Pandemic Unemployment Assistance program (PUA), which runs through the end of 2020. PUA was created to cover workers that are not covered by state unemployment programs (usually self-employed or independent contractors).
In summary, the LWA program will lead to a decline in income for those that were eligible for the Federal Pandemic Unemployment Compensation program and remain unemployed, while some unemployed workers will likely start to run out of benefits before the end of 2020. We are watching to see how this will impact consumer economic data and markets as economic data post the Federal Pandemic Unemployment Compensation program expiration is reported.
Rank Dawson, CFA
Vice President, Research and Strategy
Boyd Watterson Asset Management, LLC
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.