The COVID-19 pandemic hit the economy faster and harder than anything in modern history, and businesses had to quickly assess and address their vulnerabilities. This included scaling back on all expenses, including staff. For millions of Americans who lost their jobs, the extra $600 a week in unemployment benefits provided by the CARES Act helped them pay critical bills and maintain quality of life. But the stimulus money also had the added benefit of injecting a much-needed cash cushion into our economy.
According to a JP Morgan Chase study, in normal times, spending among unemployment benefit recipients falls by about 7% from their normal spending levels because typical benefits replace only a fraction of workers’ earnings. While averagespending for all employed individuals has dropped during this pandemic, with the extra $600 a week, unemployed workers are actually spending more — 10% more than their pre-pandemic levels and 22% more relative to employed households.
The $600 benefit ended at the end of July, and it remains to be seen if it will be extended and if so, at what level. JP Morgan Chase predicts that if the additional unemployment benefit is not replaced, unemployed households could cut their spending by around 29%.
To gain a better understanding of this impact and what businesses should do to prepare, we turned to John Kogan, the Director of our Finance Performance Improvement group. John shared that unemployment benefits are primarily paid to lower wage workers, who tend to spend a larger percentage of their income and do so more quickly than higher-income workers.
Without the additional $600 a week, food and shelter will become workers’ primary priorities, but some may have a hard time making those payments. This could have an impact on residential real estate firms. John also indicated that we will likely see a drop in all luxury or non-essential spending, from cable television to dining out. On the flipside, however, services that allow people to do more for less (such as those related to cooking at home or streaming services) may feel an uptick.
This reduction in spending by unemployed households will have a ripple effect — as individuals spend less, less money is injected into the many small to mid-sized businesses that serve them. The economic principle of the multiplier effect shows that every dollar put into the economy is spent several times, so every dollar taken out is actually multiple dollars that are not being spent.
The best thing that businesses can do to prepare for a possible drop in demand for their goods and services is to develop a financial forecast and update it at minimum monthly. The forecast will help you see the financial future for your company and better understand what your businesses’ cash may be based on the latest insight you have. It is the guide that helps you determine if you need to reduce operating expenses or lay people off. John emphasized that the gut cannot be trusted to make complex decisions like this, and it may lead you astray. Business owners should write it all down, in the form of an ongoing forecast, to get a clear sense of where the company is going before they act. Then they will be able to leverage their gut as well as real data analysis.
Once you have a financial forecast in place, you can do some scenario analysis to see how far-reaching the downtown could be and determine a continuum of responses appropriate to your company. Ultimately, John urges, businesses should have enough of a grasp on their income and expenditures so as not to spend money they don’t absolutely have to spend.