This is authored by Commonwealth Financial Network's Chief Investment Officer, Brad McMillan. The original post can be found here.
Much of the talk recently about economics has focused on how 2014 will be better than 2013. My last post was on exactly that, and I stand by it. When I woke up this morning, however, there were two significant changes that could mitigate some of that positive momentum.
The first is the expiration of extended unemployment benefits. This formally happened a couple of days ago, but it will hit this week and next. The short version is that 1.3 million people will lose their unemployment benefits immediately, with several million more poised to do so over the course of 2014.
These recipients have been unemployed for more than 26 weeks, or roughly 6 months, which is the standard combined federal and state benefit period. At the start of the financial crisis, in 2008, Congress extended the benefit period by 13 weeks, subsequently adding more extensions to a maximum of 99 weeks. It is these extensions that will expire, leaving the maximum benefit period at 26 weeks. For anyone who has been collecting benefits for more than 26 weeks, payments will stop.
The people who lose the benefits will be hit hardest, obviously, but it will also be a negative for the economy. Those payments were typically spent immediately, so there will be an immediate hit to consumer spending, which will slow the economy. It’s tough to predict the total impact, but the cost of extending benefits for another year has been estimated at around $25 billion, meaning the direct impact would be around 0.2 percent of GDP, plus an additional, hard-to-determine indirect impact. Amid all of the tailwinds for the recovery, this is a headwind.
The other big change is the implementation of the Affordable Care Act, aka Obamacare. With the website now apparently operating, and sign-ups catching up with expectations, it seems that we’ll get to see the next act of the show after all.
It should be entertaining. Sign-ups so far are reportedly skewing older and sicker than expectations, which is hardly surprising considering these are the people who most want and need health insurance. The problem is, if this persists, the insurance companies will lose money on this business and pull out. With the requirements for coverage in play— two examples being contraception and allowing people to retain limited-coverage policies
—it remains unclear exactly what the act will require and, more important, how much it will cost.
In other words, the uncertainty hasn’t gone away, just shifted a bit—and, in a way, that is more worrisome to business. While employment continues to do well (today’s initial unemployment numbers came in relatively strong), further turbulence in the insurance marketplace will certainly be a headwind and a deterrent to job creation. The more this shows up in the press, the worse the effect will be. The impact of the changing revenue and financial picture on the health care industry itself, a significant part of the economy, will only add to the potential damage.
The final factor worth considering is that 14 states are increasing their minimum wages. I wrote about the minimum wage recently and won’t recap that here. I’ll simply note that, while this change will increase incomes for certain workers (positive), it may destroy jobs or slow their creation (negative). Probably a net gain for the economy, but a loss for job creation.
Overall, the picture remains positive, but there are headwinds to be aware of that have only recently emerged. Nothing here is as significant as last year’s tax increases or spending cuts—and I don’t expect anything like the impact those had—but the net effect should be a slower recovery than we might have seen.
Happy New Year! And thanks to my kittens, Charlie and Rooney, without whose help this post would have been done in half the time.