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As 1.3 Million Americans Are About To Lose Their Jobless Benefits This Week, The Unemployment Rate Will Surge To 10.5%

Tyler Durden
Zero Hedge
June 27, 2010

As we reported on Friday, a critical bill that was unable to pass this past week was the extension of unemployment benefits to millions of Americans currently collecting a $1,200 average monthly stipend from the US government for sitting on their couch and not paying their mortgage. As a result of this huge hit to endless governmental spending of future unearned money, the WSJ reports that “a total of 1.3 million unemployed Americans will have lost their assistance by the end of this week.” Furthermore, the cumulative number of people whose extended benefits are set to run out absent this extension, will reach 2 million in two weeks, and continue rising: as a reminder the DOL reported over 5.2 million Americans currently on Extended Benefits and EUC (Tier 1-4). The net result is yet another hit to the US ledger, as soon 2 million Americans will no longer recycle $1,200 per month into the economy. In other words, beginning in July, there will be $2.4 billion less spent each month by America’s jobless on such necessities as LCD TVs (that critical 4th one for the shoe closet), iPads and cool looking iPhones that have cool gizmos but refuse to hold a conversation the second the phone is touched the “wrong” way. As the number of jobless whose benefits expire grows, the full impact of lost money will progressively increase, and absent some last minute compromise, the monthly loss will promptly hit $5 billion per month. Annualized this is a hit of $60 billion to “consumption”, and represents roughly 120 million iPads not purchased, and about half a percentage point of GDP (ignoring various downstream multiplier effects). Worst of all, as these people surge back into the labor force, the unemployment rate is about to spike by nearly 1%, up to 10.5%.

From the WSJ:

On Thursday, Senate Democrats failed to secure the 60 votes needed to break off a GOP-led filibuster. Sen. Ben Nelson (D., Neb.) voted with Republicans in a 57-41 roll call. Senate Majority Leader Harry Reid (D., Nev.) said this third vote on the matter would be the last, allowing the Senate to move on to modest legislation cutting taxes for small businesses.

The collapse of the wide-ranging legislation means that a total of 1.3 million unemployed Americans will have lost their assistance by the end of this week. It will also leave a number of states with large budget holes they had expected to fill with federal cash to help with Medicaid costs.

Up in the air are other provisions that were to be included in the legislation, including some $50 billion in new taxes designed to help offset its cost. They included an increase in levies paid by private investment groups, including hedge-fund firms and real-estate partnerships, a provision long sought by some Democrats that will likely return another day.

Under a program initially enacted last year—which expired June 2—jobless workers could receive up to 99 weeks of aid, including 26 weeks of basic assistance provided by states plus longer-term federal payments. The Labor Department estimates that the long-term unemployed, meaning those out of a job for at least six months, make up 46% of all jobless workers in the U.S.

And like every other stimulus program, there are those who focus on possible cons from the program end…

There are economic risks in ending benefits. Workers receiving them tend to funnel money back into the economy immediately, helping prop up demand and jobs.

In addition, said Harvard economist Lawrence Katz, if workers are unable to find work and no longer eligible for unemployment benefits, some will turn to other government programs, such as disability and Social Security. “If you’re really concerned about the long-term deficit, you should be really concerned about the long-term unemployed,” Mr. Katz said.

and pros…

Other economists argue that extended benefits have played a part in keeping people out of the labor force. “There’s a very large body of research that says that more generous benefits and benefits that last longer…encourage people to stay out of work longer,” said Bruce Meyer, an economist and public policy professor at the University of Chicago.

James Sherk, a labor economics analyst at the conservative Heritage Foundation think tank, said that while it could be argued that the benefits made available last year were too extensive, cutting off workers who expected to receive the full 99 weeks of benefits isn’t ideal either. “You don’t sort of pull the rug out from someone halfway through,” he said.

In our view, what will happen is that the 1.3 million who had gotten used to receiving benefits (and for whom we certainly feel sorry, as once again expectations and reality under the current administration diverge in a dramatic fashion) and had no desire to look for work, will immediately flood back into the labor force to find some job, any job, that pays even remotely as well as what the government did. What this means is that the total labor force (which incidentally dropped by 322,000 From April to May) of 154.393 million, is about to grow by at least 1.3 million, and as much as 2 million, in July. And since census employment peaked, and the number of employed will stay flat (at best) at 139.420 million, the expansion in the total labor force, will increase the unemployment rate by almost 1% in just a month, growing from 9.7% in May to 10.5% in July. That number will be reported in late August. But by then the sequel to the Great Depression v2 movie will be playing in every theater across the land, and this number will be the least of our worries.

Appendix A: average monthly benefits check as per the Daily Treasury Statement and the DOL’s weekly claims report.

Appendix B: For an extended discussion of jobless benefits, how they work, and how their expiration will adversely impact the economy, read As Extended And Emergency Unemployment Benefits Finally Begin Expiring, A Much Different Employment Picture Emerges

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