Zillow Market Pulse: July 9, 2020

July 9, 2020

Claims for unemployment benefits remain elevated. People will probably be less likely to resume spending at pre-crisis levels at in-person venues even after the pandemic eases. And tight deadlines and budgetary requirements have forced already distressed state and local governments to make significant cuts.

• Jobless claims remain elevated

  •  2.44 million claims for unemployment benefits were filed in the week ending July 4.
  • Claims rose from the week prior for the third straight week.

• Survey suggests consumers plan to spend less at certain venues after the pandemic

  • More than 40% of U.S. adults said they expect to spend less on movies, events and at bars even after the pandemic eases, according to CreditCards.com.
  • Spending on gym memberships, child care and other industries is also likely to decline.

• State governments beginning to cut spending and jobs

  • Many states' fiscal years begin July 1, forcing some to make difficult spending decisions amid rising uncertainty and declining revenues.
  • Nearly 1.5 million government jobs have been lost since March.

 So what?

More than 2 million claims for unemployment benefits were filed last week, the sixth week in a row in which claims have broached that level and the sixteenth straight week where claims were more than double the worst week during the Great Recession. Today's report once again shed light on how important the role of fiscal policy and new government programs has been thus far in the nation's recovery efforts. Of the 35.8 million workers that are currently receiving unemployment benefits, almost half (45.8%) are receiving aid through PUA – the recently-created program that extends traditional unemployment support to previously ineligible contractors, gig workers and the self-employed. The looming risks to the labor market are massive. Just two weeks ahead of the expiration of enhanced weekly unemployment benefits – which include an extra $600 a week on top of state benefits, and has perhaps been the most effective tool in buoying household finances to this point – the level of jobless claims remains very high. And there is a chance layoffs will accelerate in the near future: United Airlines, Walgreens and Wells Fargo are among large companies reportedly planning on cutting thousands of jobs nationwide.

Sharp reductions in consumer spending have been a big driver of layoffs. Spending levels rose sharply (8.2%) in May from April but remains significantly below (more than 11%) spending rates from before the pandemic. A recent survey from American Express suggests that more than 60% of the nation's small businesses said they will need to shutdown completely if spending doesn't return to normal levels by the end of the year, absent any additional support.  A separate survey conducted by creditcards.com suggests that return to normalcy is unlikely to occur, particularly in sectors that require in-person attendance. According to the survey, more than 40% of people who spent money at bars or on tickets for movies or events prior to the pandemic said they plan to spend less on those activities from now on. Furthermore, about a quarter of respondents said they plan on scaling back spending on gym memberships, haircuts, housekeeping and child care going forward. The report also stated that this cutback in spending wouldn't just be due to the (re-)imposition of shelter-in-place and social distancing measures, and that a significant number of respondents plans to scale back on these sorts of activities regardless of government regulations. The survey was fielded on three days ending June 19, just as the latest surge in coronavirus cases was gathering momentum.

Job losses, decreased spending and shuttered businesses have resulted in shortfalls in state and local income and sales tax revenues, posing a serious challenge for municipal governments' budgets and spending decisions. Job losses in the government ranks have already been severe: Just under 1.5 million local, state and federal government jobs have been cut since March – a figure that likely understates the true scale of the issue, as many government employees are reportedly taking unpaid furloughs. But cuts and layoffs that have been made thus far could just be the beginning. Many state governments' fiscal years began July 1, a deadline that forced many states to make significant spending decisions amid an increasingly uncertain economic, fiscal and public health outlook. In 41 states and the District of Columbia, local legislatures are required to pass balanced budgets, and in order to achieve this mandate, many have chosen to cut spending rather than raise taxes. Maryland recently announced an 8% reduction in overall spending, scaling back on funding for public transit, drug treatment and higher education. Georgia decreased spending by about 10%, including an almost $1 billion cut to the state's education fund. Other states are making similarly difficult decisions. State and local government spending amounts to about 11% of GDP, and local governments employ about 12% of all workers across the country.

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