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In February Congress reached a deal to scale back federal extended unemployment benefits. Although the program was extended until the end of 2012, the number of weeks were cut back from a maximum of 99 weeks and qualifying for the program was made more difficult for the states. According to the National Employment Law Project nearly half a million people lost their extended benefits sooner than expected by the middle of the year. The average weekly unemployment check is close to $300 per week. This means household incomes from extended unemployment checks fell by $650 million in June compared with what they would have been the previous two Junes when the program was fully in place. As the year progresses several hundred thousand additional people will lose their checks prematurely at a time when the unemployment rate is still 8.2% and hiring remains weak.

According to a report released by the United States Department of Labor in November 2010, for every dollar spent on unemployment insurance, economic activity increases by two dollars. The Congressional Budget Office estimates that every $1 billion spent on unemployment benefits creates 19,000 jobs. This means in addition to the loss of $650 million in spending in June from the cuts in extended unemployment benefits, the economy lost close to 13,000 jobs in June. The June Unemployment Report showed the direct impact of the loss of unemployment income as retail, transportation, and warehousing jobs fell by 7,600 in June. This trend should continue in the retail sector as more and more people fall off of extended unemployment benefits than would have throughout the rest of the year.

The impact of less disposable income is being seen by multiple retailers. Best Buy (NYSE:BBY) is cutting 2,400 employees, including 600 from its vaunted Geek Squad. Retail sales in general posted their worst results in three years. Not coincidentally, the last two Junes included a lot more extended unemployment checks. Large general category retailers Costco (NASDAQ:COST) and Target (NYSE:TGT) saw their June sales fall 6% compared with June of 2011. While Wal-Mart (NYSE:WMT) no longer reports monthly sales figures, it too is feeling the effects of fewer unemployment checks.

Retailers have been spared from the full brunt of the big increase in unemployment by the generous extended unemployment benefits program from the federal government. But as the year rolls on and more and more extended unemployment checks are cut off retail sales will continue to slump compared with last year. While the program is scheduled to end at the end of the year, the complex negotiations over multiple expiring tax and spending benefits could result in some sort of continuation of extended unemployment benefits in 2013.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Retail Sales Suffer From Loss Of Extended Unemployment Benefits