Massachusetts began 2020 with $1.7 billion in its Unemployment Insurance (UI) Fund and $3.4 billion its rainy day fund. I estimate that the UI fund is now running a deficit of around $500 million.
I’m new to the subject of State finances, so please don’t quote me. On May 1st, Mass transferred $750M from its general account at the U.S. Treasury to its UI account. Leaving out any Federal assistance specifically for the pandemic, UI payment will wipe out Mass’s total Treasury account savings by October, assuming a current $800 million per month burn rate. In short, Mass began 2020 with $5 billion, has paid out $2.5 billion in UI claims as of June and is on track to pay out another ~$2.4B in the next three months.
At this rate, by January, 2021, Mass and most States must raise taxes and cut spending. Can the U.S. Dollar defend internal State finances and its position as Global Reserve Currency at the same time?
Mass has a total population of around 6.9 million with an employed population of 3.14 million. The U.S. Department of Labor (DOL) is currently reporting 16.1% unemployment for Mass. (That’s misleading; we don’t expect children or retired people to work). Against the Mass workforce that works out to 1.1 million Massachusetts workers unemployed or 35% of the pre-pandemic level!
MIT and Harvard have already indicated that they will not fully open in the Fall. Yes, their endowments keep them institutionally safe. However, the same can’t be said for the rank-and-file New England education industry. Further, even Harvard won’t pay people to twiddle their thumbs in empty lecture halls and cafeterias. The question isn’t will the local universities lose money and lay-off staff, the question is how much.
Many students won’t want to pay full freight and I expect both the Federal Government and States to argue the same, reducing funding. The combination of factors should create a second wave of layoffs. I expect they will be smaller in number than the first wave (entertainment, travel, hospitality, etc) but larger in taxable costs (higher wage loss). There is NO GOOD NEWS about New England economic growth.
Looking at DOL statistics, there are around 500,000 Mass workers in “Office and Administrative Support Occupations”. In “Education, Training, and Library Occupations” we have another 250,000. Let’s make it an even 1,000,000 jobs at risk from the pandemic. If 20% is a good estimate for how much the Mass economy will shrink next year, that’s 200,000 salaried workers that will probably lose their jobs in the next 12 months.
There are currently 23,000 homes for sale in the New England area. Where will the buyers with new jobs or promotions come from? How many of the 1,000,000 and growing number of Mass workers will need to sell? I expect New England real estate market to switch from envy of the nation to charity case in the next few years.
The above chart illustrates the head-shaking state of affairs of a muni bond market completely divorced from “municipal” reality. Mass is experiencing near financial armageddon yet its existing municipal bonds are back to pre-Covid prices.
Eventually, the Fed’s efforts to maintain low interest-rate liquidity will meet its match in corporate and municipal defaults.