Zillow Market Pulse: July 14, 2020

July 14, 2020

Consumer prices rose in June from May, the first monthly increase in three months, but the durability of these gains is in doubt. Research shows that letting enhanced unemployment benefits lapse would pose significant economic risks. And small businesses remain pessimistic about their prospects.

• Consumer prices rose for the first time since February

  • The Core Consumer Price Index (CPI) rose 0.2% in June from May.
  • The index rose 1.2% year-over-year.

• Looming expiration of key jobless benefits poses big potential risks for the economy

  • Enhanced unemployment benefits – including an additional $600/week to those who lost their jobs – are set to expire July 25.
  • Studies suggest that letting the assistance lapse would set the economy back 2.5% in the latter half of the year and halve the income of 30 million people.

• Most small businesses are in desperate need of more relief

  • According to Goldman Sachs, just 16% of small businesses are very confident that they can make payroll without additional government relief.
  • Currently, the last day to apply for the Paycheck Protection Program is August 8.

 So what?

The reopening of much of the country in May and June prompted record monthly increases in consumer spending — in turn, helping push prices upward and toward a more normal path. The Core Consumer Price Index – which generally measures what U.S. shoppers pay for everyday items, absent food and gas – rose 0.2% in June from May, the first monthly increase since February, and was up 1.2% from the same period last year. The monthly improvement should help ease fears of the pandemic causing prices to consistently fall (aka deflation). But as has been the case throughout this pandemic, today's data already feel like old news because of the recent surge in case volumes around the country, and many states' plans to pause or reverse reopening. The end-of-month expiration of crucial relief benefits to individuals and small businesses also looms large – removing this aid could theoretically reduce demand for goods and services and possibly nudge prices back downward. 

The potential impact on prices is only one of several growing concerns centered around soon-to-expire federal aid programs. New research finds that the additional weekly unemployment payments and the expanded unemployment eligibility requirements through programs including Pandemic Unemployment Assistance (PUA) have had an enormous benefit keeping household finances afloat and spending levels stable. The Bureau of Economic Analysis recently found the extra $600/week in unemployment payments offered through these programs accounted for more than 14% of wage and salary income in May. Studies also suggest an extension of the program would (by itself) increase GDP by as much as 2.8% and support as many as three million jobs. On the flip side, researchers predict that the abrupt expiration of these benefits would reduce GDP by about 2.5% in the second half of this year (more than a typical year's worth of growth) and reduce the income of more than 30 million people by between 50% and 75%. Downstream effects – including a wave of evictions, loan defaults, declines in spending and subsequent job losses – are also likely to occur should these benefits go away. Recent reports suggest that the White House is considering a partial extension to the program potentially involving smaller weekly benefits, but the timeline for any decision is very tight. The last day to apply for unemployment is July 24, a week before the end of the month, and the Senate isn't scheduled to return from a break until July 20 — just 5 days before the program is set to expire.

A second federal aid measure, the Paycheck Protection Program (PPP) – which offers low-interest forgivable loans to small businesses to help them cover payroll, rent, and other core expenses – is currently set to expire August 8. It has also generally been a success (though not without some qualms over the strings attached to it), offering support to nearly 1 million small businesses nationwide. According to Goldman Sachs, 84% of businesses that have received aid through the program expect to exhaust the funding by the first week of August — just as the program is set to expire. Without further relief, just 16% of businesses say they are very confident they'll be able to maintain payroll going forward. And only about a third of respondents said they believe they'll be able to survive another wave of COVID-19 cases that temporarily closes their doors. That does not bode well given the fact that almost 80% of the country now faces a pause or rollback of existing local reopening plans.

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