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  While there is plenty of talk about the economic recovery, there is barely a whisper about what is just a few weeks ahead. It's not any one thing. It's a combination of three (and possibly four) different events that will deliver devastating body-blows to the economy.
  They are all being talked about, but no one that I've seen has put them all together.
That's where I come in, the doom-and-gloomer, with the news that no one wants to think about, but you are better off knowing now rather than later.

Losing the lifeline

  It's been well-reported that unemployment benefits can last for 99 weeks (aka the 99'ers). What has been almost completely lacking in the news coverage is that June 2nd is the drop-dead date for unemployment extensions.

 On April 12, 2010, Senator Sherrod Brown of Ohio attempted the impossible and "urged an extension on unemployment insurance". At that time, Senator Brown also stated, "Many of my colleagues had no problem giving tax breaks to companies that shipped jobs overseas, but now balk at extending unemployment insurance."

 Currently there are four "Tiers" of extended unemployment insurance. If you were laid off early in the recession then you were eligible for the full 99 weeks. But let's say you were laid off in the spring of 2009 and you are on Tier Three of the emergency extended benefits that runs out in July.
  If you are in that boat then you are sh*t out of luck. The only way you are eligible for Tier Four is if your benefits expire before the end of May.

 This applies to all tiers. Thus if you were laid off only, say, 24 weeks ago, you aren't eligible for any federal unemployment benefits when the state UI expires after 26 weeks. Not even Tier One.
 Currently the average duration on unemployment is 8 months. That's going to effect around 7 million people.

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 This means that literally millions of long-term unemployed are going to be losing their last lifeline in the coming months.

 More than 400,000 jobless workers could run down their federal benefits each month over the next several months, even assuming that Congress continues to renew the expanded benefit period now in place.

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 There is some proposals for moving the deadline out for a few months, but nothing concrete at this time with only a week to go before the clock strikes midnight.
  As for those who have actually used up the full 99 weeks of UI, there is almost no hope of a Tier Five being created.

The limits of stimulation

 From the start of the year until about now, the Census will hire 1.2 million Americans. That's a lot of people getting jobs at the absolute best time. Unemployment is currently higher during a census period than at any time since 1940.
  The problem is that it was never meant to be anything other than a temporary boost for employment, and that boost is coming to an end.

 Since 1990 the largest month-over-month growth in Census workers was the 348,000 hired in May 2000 (225,000 were shed the following month).

 The May unemployment numbers will probably look pretty good because of the Census, but starting in June those same people are going to be laid off by the hundreds of thousands every month.

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 Meanwhile, Obama's stimulus bill is over half spent and is scheduled to be drawn down by the end of September.

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 One of those stimulus items, the homebuyer tax credit, has recently expired. Early effects indicate the slight bounce in housing over the past year is over. Also the FHA is tightening up on closing cost assistance, and poor mortgage lenders.

States of Crisis

 It's hard to miss all the talk of broke states, California in particular, almost all of whom will need to craft a new austerity budget in the next couple months. The current proposed California budget completely eliminates welfare, not just cutting it. That should give pause to those hundreds of thousands of people about to lose their UI.
  To make matters worse, even after those draconian cuts, Schwarzenegger's proposed budget is still $7 billion short of balancing the budget, and lawmakers are in no mood to compromise. Thus we can expect to see another political standoff.

 "California no longer has low-hanging fruit. In fact, we no longer have any medium-hanging fruit, nor any high-hanging fruit," Schwarzenegger said.

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  California is far from alone. The Arizona governor is warning of a "collapse" of the government. New York is running out of money. Illinois is handing out IOU's and says there are no good solutions.
  Elimination of services are not the only things worth noting.

 states will approach their June fiscal year-ends and, as a result of staggering budget gaps, soon announce austerity measures that by my estimates will cost between one million to two million jobs for state and local government workers over the next 12 months...
 States will raise taxes, but higher taxes alone will not be enough to make up for the vast shortfall in state budgets. Accordingly, 42 states and the District of Columbia have already articulated plans to cut government jobs.

 As many as 300,000 of the layoffs are expected to be school teachers.
  On top of no federal unemployment extensions, we are looking at a million census workers being laid off, plus another million or two state workers, and this all happens in the next couple months.

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  Will the private sector be able to absorb this labor surplus? Not likely. Small business, the main drivers of the economy, have had their credit cut by Wall Street banks.

 Small businesses continue to struggle to gain access to credit and cannot hire in this environment...
  Small businesses fund themselves exactly the way consumers do, with credit cards and home equity lines. Over the past two years, more than $1.5 trillion in credit-card lines have been cut, and those cuts are increasing by the day. Due to dramatic declines in home values, home-equity lines as a funding option are effectively off the table.

 The solution to this calamity is all too obvious.

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The Ouzo Effect

 The Greek Debt Crisis is causing havoc all over Europe. Bank lending is drying up and the currency is in freefall. In response, the governments of Europe are dramatically cutting back their spending.

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 How much of this will spill across the sea to America is uncertain, but you can't ignore the fact that Europe's economy is larger than America's. The shockwaves are already effecting China, where their stock market has dropped more than 20% and home sales dropping off a cliff.
  If this crisis isn't contained very soon, it is likely that it will have a significant and negative impact on the American economy.

Originally posted to gjohnsit on Tue May 18, 2010 at 09:37 AM PDT.

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