Watch Live

Tweet TWEET

End of Extended Benefits to Reduce U.S. Growth, Nomura Says

The Senate’s failure to pass legislation extending unemployment benefits will slow the pace of the U.S. recovery, said economist David Resler.

The bill’s demise will trim economic growth by 0.2 percentage point this quarter and by 0.4 point in the period from July through September, estimated Resler, chief economist at Nomura Securities International Inc. in New York.

“This will have an immediate impact on the economy in the next few months,” Resler said in a telephone interview today. While “the economy doesn’t have quite as much steam as we previously thought,” he said, “we’ll be able to endure the consequences.”

The economy expanded at a 2.7 percent annual pace in the first quarter, down from a prior estimate of 3 percent, revised Commerce Department figures showed today. The projected effect on growth is a “rough and ready” estimate based on the duration of benefits, which would have been extended through November had the bill passed, and the termination of a $25-a- week federal supplement, Resler said.

Senate Republicans yesterday killed the bill to extend benefits, provide aid to state governments and raise taxes on buyout fund managers, saying the measure would add too much to the federal deficit. The legislation included about $35 billion in spending on jobless aid over the next five quarters, Resler said.

The failure of the bill will subtract about $6.5 billion from the economy in the quarter ending June 30 and another $19 billion in the following three months, he projected.

Emergency Program

Department of Labor estimates show 2 million workers, or 20 percent of all recipients of jobless aid, will fall out of the Emergency Unemployment Compensation program by the second week of July.

Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, estimates that the end of emergency benefits will subtract about 0.1 percent from personal incomes in June. If the program isn’t renewed, incomes will fall by 2 percent at an annual rate in the third quarter, Feroli said in a note to clients.

Given that workers are more likely to consume rather than save the benefits, the direct effect on consumer spending would be similar to the impact on income, he said.

The number of Americans who have used up their regular jobless benefits and are receiving extended or emergency benefits under federal programs increased by about 45,000 to 5.3 million in the week ended June 5, Labor Department figures showed yesterday.

Jobless Rate

Resler estimated that the unemployment rate, 9.7 percent in May, may decline by as much as one percentage point as some workers drop out of the labor force and others accept jobs they might have rejected earlier.

The Senate’s 57-41 vote yesterday in favor of the measure fell short of the 60 votes needed to advance it. Democrats repeatedly cut the bill in an effort to win backing from those who objected to its cost.

The latest version would have added $33 billion to the budget shortfall, a fraction of previous proposals. Republicans said the cost-cutting didn’t go far enough. The House of Representatives approved its own version of the bill earlier.

The Senate vote “is a sign there’s a growing recognition in Washington, and around the world, that maybe it’s time to see if we can wean ourselves off the stimulus,” Resler said. “It signifies a shift in the mood from whatever-it-takes to let’s- be-careful.”

To contact the reporters on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.