Extended unemployment benefits were enacted by the Bush Administration in June 2008 when unemployment was 5.6% and seventeen weeks was the average duration of unemployment. Five and one-half years later, the U.S. is near 7% unemployment with the average duration around twice that of 2008. The benefits would seem to be more essential than ever, yet they were allowed to expire at the end of December 2013.
Congress is currently fighting over extending these benefits, and much of the battle follows party lines. Many Republicans argue that we are providing disincentives to job seekers by providing ongoing income support, while Democrats say that removing benefits will harm the economy and is morally wrong during times of extended high unemployment. In the end, regardless of who is right or wrong, how might this debate affect your investment portfolio?
The answer probably has less to do with the economic impact of the extension itself than with the reactions to it. The program cost in the proposed Congressional bill is $6.4 billion – not trivial, but in the context of a 2014 budget that contains just over $1 trillion in spending, unlikely to push the economy over the edge. The effect on future debts and deficits should be minimal at best.
According to the Department of Labor and the Council of Economic Advisers, a total job loss of 240,000 is projected from the negative ripple effects of not renewing these benefits, and the positive ripple effect of extending the benefits returns $1.64 for every $1 spent. There is little doubt that these benefits do go directly into the economy – people on long-term unemployment benefits are using them for groceries and bills, not adding them to a house-purchasing fund or buying stock futures. It also makes sense that there will be some job losses if the benefits are not extended, as subtracting $6.4 billion from the economy has its price. However, the magnitude of both effects is debatable.
Republicans would in turn argue that extending benefits without paying for them elsewhere in the budget increases the debt, and that the emphasis should be on creating more jobs for the long-term unemployed to fill.
In either case, the key element is jobs, and the upcoming unemployment numbers will probably have the greatest effect on your portfolio regardless of what Congress does. If benefits are not restored and the Democrats are right, unemployment numbers are likely to continue the disappointing trends of December. This may affect the Fed's action on interest rates.
The Fed's program of purchasing bonds to keep interest rates low (otherwise known as quantitative easing) has begun slowly ramping down and interest rates have been climbing. Poor unemployment numbers may cause the Fed to keep bond purchases flat or even increase them. If recent history holds, this would cause interest rates to fall and stocks would continue to be an even more attractive alternative to bonds.
Another potential effect to watch is foreclosures. It seems likely that home foreclosures would increase without benefit extensions, affecting the housing market, and blunting recent home value gains. If you are invested in real estate, you will want to watch foreclosure trends.
Our guess is that an extension is likely to pass Congress eventually, especially in an election year. It also seems probable that there will be some sort of compromise spending cut or revenue generating trade-off to get the bill passed by both houses. Unless there is such a tradeoff and it has direct impact on stocks you are heavily invested in – for example, a tax on energy companies – there is likely to be little impact on your portfolio.