As of March 27, 2020, 217 million Americans across 23 states, 84 counties, 17 cities and one territory formally are being urged by government officials to stay home. (Source: NY Times). The economic effects are reflected in last week’s record-breaking 3.3 million initial claims for unemployment. The spike in unemployment will reverberate through the economy as mortgage and other debt payments are missed and consumer spending slows. Typically, in a recession, unemployment increases gradually as a feedback loop of deteriorating confidence and slowing consumer spending leads to a modest rise in unemployment, which, in turn, further impacts confidence and spending. The coronavirus has dramatically accelerated and intensified this process.

On Friday, March 27, the President signed into law the $2 trillion stimulus bill known as the CARES Act, which was developed by the US Senate and passed by both Houses of Congress. The stimulus is built around five pillars:

1. Resources for the health care system
2. Expansion of unemployment benefits
3. Direct payments to individuals
4. Support for local governments
5. Support for small business

Given that Americans are experiencing this crisis in vastly different ways (i.e. the inconveniences of working from home are vastly different than being unable to work at all and/or on the verge of losing one’s home), we think it’s particularly important to note the benefits designed to directly put funds in the pockets of individuals.

While we support the one-time cash payment of $1,200 to many Americans, it’s important to note that these payments do NOT apply to people who previously earned above the income limitations and are newly unemployed. That said, the Act’s expansion of unemployment benefits is significant, likely stemming at least some of the defaults and some of the drop in consumer spending that typically occurs with job losses. The Act expands unemployment benefits from 26 to 39 weeks and expands coverage to self-employed and part-time workers. Typical unemployment benefits cover only 40 – 50% of prior wages (with variability across states); however, the Act increases the weekly benefit by $600. The average unemployment benefit in the US in January was $385/week. An additional $600 would bring this to $985, higher than the median wage of $936 during the fourth quarter of last year. (Source: Forbes). On average, unemployed lower wage earners will have more spending power than they had when they were employed prior to the crisis, providing not just economic relief but direct stimulus.

While improving the breadth and depth of unemployment benefits is a priority of the Act, Section 7(a) strives to mitigate worsening unemployment in the first place. Small businesses with fewer than 500 employees potentially can benefit from a roughly $350 billion forgivable loan program dedicated to incentivizing US small businesses to stay in business and to keep their current payroll intact. Should payrolls remain whole during the life of the loan, the loans convert to grants, a significant incentive.

Support for large corporations is more limited and there are no obvious incentives for large corporations to mitigate layoffs. That said, the airline industry appears well-supported. The Act provides relief cash grants of up to $25 billion to US passenger air carriers, $4 billion to cargo air carriers, and $3 billion to airline contractors. Grants are made exclusively to support the continuation of employee compensation. An important caveat, however, is that corporations who utilize the aid will grant the US Government potential equity stakes, warrants, or other financial instruments to appropriately compensate taxpayers, a strategy that was used in some cases during the financial crisis. Clearly, not all companies will seek government assistance, at least at this stage in the crisis. Southwest Airlines indicated this week it could reject any Federal aid and offered flight attendants voluntary leave with partial pay.

Despite the significant disruptions the coronavirus crisis is causing in the world, it’s human nature to overcome adversity. Ultimately, we will triumph; however, the economic landscape may be very different as families, communities, and even entire industries are upended. With much of the country under stay-at-home orders, we hope that you and your family are safe and healthy and maybe even enjoying some extra time together during this tenuous time.