Measuring the US fiscal cliff

Via BofA:

Fiscal cliff economics

• Many pandemic-aid programs in the CARES Act are set to expire at the end of the year without action from Congress.
• The expiration of federal UI programs—PUA and PEUC—alone could be a drag of 1.5pp in 1Q. Cutoff of other provisions will be additional headwinds.
• We expect Congress to pass another package of $500bn-$1tn in early 1Q which should offset the drag and support growth into 2Q.

On the cliff’s edge

Many provisions in the CARES Act are set to expire at the end of the year without action from Congress. Here we take a look at the upcoming fiscal cliff and its potential impact on the economy. We find that the expiration of the federal unemployment insurance (UI) programs alone could be a drag of up to 1.5pp to growth in 1Q. The expiration of eviction moratorium, mortgage forbearance programs, and suspension of student loan payments could all be headwinds early next year, creating further obstacles.

Hard deadline for UI benefits

The CARES Act expanded unemployment insurance eligibility and duration during the pandemic. The Pandemic Unemployment Assistance (PUA) program gave unemployment benefits to workers who are normally ineligible for regular state UI programs such as contract and self-employed workers. The PUA gave these workers 39 weeks of unemployment benefits. Meanwhile the Pandemic Emergency Unemployment Compensation (PEUC) program provided 13 additional weeks of benefits to those that exhausted regular state UI benefits. These programs will expire on December 26th.

Currently, there are over 21mn unemployed workers receiving UI benefits of which 13.6mn are enrolled in either PUA or PEUC (Chart 1). According to analysts at the Century Foundation, roughly 12 million workers enrolled in PUA or PEUC will see their UI benefits cut off at yearend. This would roughly translate into an income shortfall of $39bn in 1Q if these workers are unable to find work or alternative income support. Based on our work on fiscal multipliers, income loss of $39bn would translate into a 1.2pp hit to growth on an annualized basis in 1Q 2021.

Beyond the direct hit to those losing their benefits at yearend, many that are currently on regular state UI programs will exhaust their eligibility and be left without a safety net. A back of the envelope calculation suggests an additional 2.4mn workers who are currently on regular UI benefits will exhaust all available UI resources by 1Q of next year, which would amount to roughly an $8bn income loss or a drag of 0.3pp to growth.

Admittedly, our estimates are likely to be upper bound as it assumes all workers exhausting UI benefits will remain unemployed for the full quarter. Still, without any additional UI support, we estimate the income loss could be a drag of up to 1.5pp to growth in 1Q 2021. Moreover, there could be a second mini-cliff in 2Q if there is no additional stimulus as workers on extended UI benefits in select states exhaust their aid.

Bills come due

The CARES Act also provided some temporary payment relief. It prohibited landlords with federal guaranteed mortgages from evicting tenants until December 31st. According to a survey run by the Urban Institute, 1/3rd of landlords reported not being paid rent in full in September. This implies roughly 30mn renter households will be at risk of eviction once the moratorium expires. Homeowners with federally guaranteed mortgages could request loan forbearance up until December 31st. Those who requested and received forbearances prior to the deadline would be able to delay mortgage payments up to a year. According to the Mortgage Bankers Association, loans in forbearance stood at 5.7% in the week ending November 15, which roughly translates to 2.7mn homeowners in some sort of forbearance plans.

While it’s difficult to quantify the growth impact from these provisions expiring, we expect it to have a meaningful impact if consumers are unable to keep current on their debt. According to a study done by Collison and Reed (2018), the value of avoiding an eviction is approximately $8,000 per household.3 Meanwhile, studies on foreclosures showed that foreclosure-related sales had prices about 27% lower than comparable properties and each foreclosure lowered the selling price of nearby non-foreclosure properties by 1%.4

There’s nontrivial risk that many households will be unable to pay their debts. The latest Household Pulse Survey from the Census Bureau shows that close to 30% of renters and roughly 12% of homeowners with mortgages have slight-to-no confidence that they will be able to make next month’s payment (Chart 2).

Last, consumers with student debt will have to resume payments in January. According to a study done by the NY Fed, the payment freeze during the pandemic saved borrowers roughly $7bn per month. All told, debt payments coming due could be a major headwind for the economy at the start of next year.

An economy without a safety net

The economy will be operating without a safety net in January. It is likely to be shortlived, however, as we expect Congress and the new Biden administration to strike a deal on a new stimulus package of $500bn-$1tn after inauguration. Ultimately the new package should be able to offset the drag and boost growth by 2.5pp in 2021. However, time is of the essence – any delay after inauguration will create a headwind.

Which is why we remain very skeptical of banks in any value rotation scenario.

David Llewellyn-Smith
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