Why Yanking Unemployment Payments Didn’t Kill the Economy in August

A man wearing a face mask and gloves carries a tray of food to an outdoor table.
A waiter serves patrons at L’Escale restaurant on May 20 in Greenwich, Connecticut. John Moore/Getty Images

When Congress let the $600 weekly unemployment payments it created in response to the coronavirus crisis expire at the end of July, many worried it would deal an immediate and painful blow to the economy. Millions of jobless Americans were relying on the benefits to cover their bills, and cutting them off seemed like a good way to tank consumer spending (while deepening the country’s general atmosphere of misery).

But that doesn’t seem to have happened—at least, not immediately. The Commerce Department reported on Thursday that while personal incomes did fall by 2.7 percent in August, largely thanks to jobless benefits disappearing, consumer spending actually increased for the fourth month in a row, ticking up another 1 percent.

How did spending stay afloat, even while the government cut off billions in aid? Here are three potential reasons.

1. Businesses Kept Hiring

While job growth did slow down a bit between July and August, companies still continued bringing back their workers as states pushed forward with their reopening plans and customers returned. As a result, wages and salaries crept up a bit during the month, which partly made up for the reductions in unemployment benefits.

It helps that, for white-collar workers who can telecommute, the recession is practically over. By the end of July, employment was nearly back to normal for Americans who earn more than $60,000 a year, according to data tracked by the Opportunity Insights project at Harvard. To that group, the end of the $600 payments probably didn’t matter a great deal.

At the same time, people who work in low-wage service industries like bars and restaurants are still facing mass joblessness, and it was reasonable to expect that slashing unemployment benefits would force many of them to cut back on spending. But surprisingly, there isn’t much evidence that’s happening in a widespread way yet. (Just to be crystal clear, we’re talking about aggregate numbers here. Obviously, there are people who have suffered since their aid was cut). According to Opportunity Insights, consumer spending in low-income ZIP codes increased through August. According to the Census Bureau’s Household Pulse survey, measures of serious economic hardship also improved, instead of worsening, as some might have anticipated. The shares of Americans who said they couldn’t afford enough to eat and who were concerned about being able to make their next rent payment both declined from July to August, for instance.

If so many workers who were barely scraping by before are still out of work, why didn’t cutting their benefits cause more harm? Well …

2. Late Unemployment Payments Kept Trickling In

One part of the answer is that some Americans were still getting bulked up benefits even after they technically expired, because they were owed back payments from previous weeks. (Some slow-moving state unemployment systems, such as California’s, are still working through their backlog of claims.) According to the Commerce Department, the federal government spent about $18.5 billion on Pandemic Unemployment Compensation—the $600 payments—in August. While that’s a massive drop from the $74 billion it laid out in July, that’s still a significant amount of aid. The Trump administration also began paying out the temporary $300 weekly unemployment benefit it created unilaterally when Congress’ program flickered from existence, though only a tiny amount of money went out the door.

3. People Have Been Saving a Ton of Money

Another likely factor: Americans have been stowing away a ton of money over the last several months. The personal savings rate skyrocketed from 8.3 percent in February before the crisis to 33.6 percent in April. Even in July, it was still 17.7 percent. Some of that money is being stashed by higher-income households who have cut back on luxuries like nice dinners out and vacations. But it’s plausible that Americans on unemployment during the spring and early summer managed to save as well, given that thanks to the flat $600 federal payment, many beneficiaries were collecting more in benefits than they’d previously earned at work.

In short, Americans were able to keep spending as some people went back to work, some people finally got money they’d been owed for weeks if not months, and some people broke into their emergency savings. The economy didn’t suddenly crash in August, as many feared. But it did burn through some of its leftover fuel reserves. It may have even been able to continue coasting through September, but without another round of aid—still no sure thing—I wouldn’t bet that we can keep it up indefinitely.