Jobless Claims Up, But Trend Still Down

Initial Claims for Unemployment Insurance rose by 18,000 last week to 409,000 (last week was also revised up by 3,000, so one could see it as a 21,000 increase). This was slightly worse than the expected level of 405,000. The massive drop during the Christmas week was clearly affected by some seasonal (and weather) factors.

Still, the overall direction of initial claims is clearly downward. We finally have gotten out of the “trading range” that initial claims have been in for the last year. Initial claims have been generally trending down since they hit a secondary peak of 504,000 (after revisions) on 8/14.

Since claims can be volatile from week to week, it is better to track the four-week moving average to get a better sense of the trend. It fell by 3,500 to 410,750. After declining sharply in the second half of 2009, the four-week moving average was stuck in a tight trading range for most of 2010. Now we seem to have broken clearly below the previous lows in the range.

This was the lowest level of the four-week average since July 2008 and the financial meltdown. We appear to be getting closer to the point where we have a real recovery — one that actually produces enough jobs to bring down unemployment, rather than the pseudo-recovery we have been in for the last year and a half.

If the current downward trend can be sustained, there is real hope. The economy is growing, but not at the sort of rate needed to add a significant number of jobs and to put a dent in the huge army of the unemployed. The November employment report was clearly disappointing, but the ADP report yesterday was extremely encouraging, showing an increase of 297,000 private sector jobs.

While it would have been nice to see initial claims to have continued down again this week, nobody really expected that to happen. I would still caution that these numbers can be a bit flakey around the holidays, even though they are seasonally adjusted.

The direction of initial claims over the next few weeks as we get out of the holiday season will be very interesting to watch. In hindsight, the run up to 500,000 seems to be mostly a function of the Census workers being laid off. As that effect waned, we returned to the previous baseline. Relative to a year ago, the four-week moving average is down by 56,500, or 12.1%. The graph below (from http://www.calculatedriskblog.com) charts the path of the four-week average since the start of the century.

The second graph provides a much longer-term picture of initial claims, along with the number of jobs created or lost each month. Note that in the previous two cycles, there was a long high plateau of initial claims after the recession officially ended, in contrast with previous cycles where initial claims fell almost without pause once the economy started to recover. This cycle the recovery seems to be happening faster than in the previous two, but not as fast as in the downturns prior to those.

The previous two recessions were relatively mild affairs compared to either the Great Recession or the Reagan Recession. Note that there is a very strong inverse correlation between initial claims and job growth, and that once initial claims fall below 400,000 the economy generally shows strong job growth.

Continuing Claims

The data on regular continuing claims was also encouraging. Regular continuing claims for unemployment insurance fell by 47,000 to 4.103 million. They are down by 897,000, or 17.9%, from a year ago. Regular claims are paid by the state governments, and run out after just 26 weeks. However, in November, half of all the unemployed had been out of work for 21.6 weeks (down from 25.5 weeks in June, but up from 21.2 weeks in October), and 41.9% had been out of work for more than 26 weeks. Just for a point of perspective, prior to the Great Recession, the highest the median duration of unemployment had ever reached was 12.3 weeks near the bottom of the 82-83 downturn.

Clearly a measure of unemployment that by definition excludes 41.9% of the unemployed paints a very incomplete picture. After the 26 weeks are up, people move over to extended benefits, which are paid for by the Federal government. While regular claims are down, it is in large part due to people aging out of the regular benefits and “graduating” to extended benefits.

However, recently even the extended claims have started to trend down, though in an irregular fashion. This week they (the two largest programs combined) fell by 23,000 to 4.507 million. Relative to a year ago they are down 950,000 or 17.4%.

A much better measure is the total number of people getting benefits, regardless of which level of government pays for them. Combined, regular claims and extended claims (including a few much smaller programs) fell by 92,000 on the week and are down 1.905 million or 17.9% over the last year.

Obama’s Tax Deal with GOP

The recent deal President Obama made with the GOP to extend the Bush tax cuts for all for two years included an extension of unemployment benefits until the end of 2011. People will still “graduate” from the system after 99 weeks, but they will continue to be able to move to the next tier up to the 99 week limit.

The tax deal prevented 2 million people from losing this last financial lifeline. The downside to the deal was that it will reverse the downward trend in the budget deficit and cause the deficit to be higher in fiscal 2011 than it was in fiscal 2010, possibly exceeding the 2009 record deficit.

Some claim that the long duration of unemployment benefits has actually discouraged people from looking for work, that people are content to live forever on 60% of their previous income, or $400 per week, whichever is lower. The average benefit is only about $300 a week. Ask yourself how well could you live on $300 per week.

Jobs Remain Scarce

Right now there are almost five people out of work for each job opening. Just telling everyone out of work to “get a job” isn’t going to get it done. The extension of benefits is one of the key reasons that initial claims are falling (as per the four-week average).

The fact that extended claims have not increased significantly in the wake of the extension is very good news. It is worth noting that even with the deal there will be large numbers of people who lose their benefits. Those are the “99ers.” The 99 weeks of benefits they get works out to be just short of two years. The heaviest period of lob losses in the Great Recession was just about two years ago. Many of those people have still not found jobs, and as time goes by they become less and less attractive to employers.

The tax and unemployment insurance deal should be stimulative to the economy, or at least prevents fiscal contraction from occurring. The temporary cut in the payroll tax is a net new stimulus and should help increase growth in 2011. Extended unemployment benefits are, dollar of dollar, one of the most effective forms of economic stimulus there is.

It is a pretty good bet that the people losing their extended benefits have depleted their savings and run up all the debt they can in trying to make ends meet. The maximum unemployment benefit works out to be just $20,800 per year, or less than the poverty line for a family of four. You think any of those people have been able to sock any of that away?

There is a concern that by cushioning the blow of unemployment, people might be more reluctant to take a marginal job opportunity, but a below poverty level income is not that much of a cushion. I’m not sure it is good for the economy for highly skilled people to be taking jobs in other fields that have no use of those skills, and then be unavailable when those skills are needed again.

Extended Claims as Economic Stimulus

The people who get extended benefits tend to spend the money quickly on basic needs. This in turn keeps customers coming in the door at Wal-Mart (WMT) and Family Dollar (FDO). It means that, at the margin, some people are able to continue to pay their mortgages and thus helps keep the foreclosure crisis from getting even worse than it already is. However, by the time they are well into extended benefits, they might also be spending food stamps as well as the unemployment check at Kroger’s (KR).

These customers keep the people at Wal-Mart, Family Dollar and Kroger’s, and of course their competitors, employed. It also keeps the people who make and transport those goods employed as well, although in that case much of the stimulus is lost overseas if the goods are imported.

However, it is not clear if the marginal propensity to import is higher for poor (or temporarily poor because they are unemployed) or for the rich. Lots of the stuff on the shelves of Wal-Mart comes from China. On the other hand, the poor are not likely to be buying Swiss watches or German autos. They will not be buying frivolous things like Fiji water imported from halfway around the world.

What is clear is that they will spend it quicker, increasing the velocity of money, than will the rich who will tend to save more of it, particularly if they see the increased income from say a continued tax cut for the highest income people as temporary. The rich are much more likely, in other words, to fit Milton Friedman’s “Permanent Income Hypothesis” than are the unemployed, since the rich do not face liquidity constraints.

Also, if you remember your Friedman, velocity of money counts, and it counts a great deal. P * Q = M * V. Price times quantity in the aggregate is nominal GDP, and it is equal to the amount of money in circulation times how quickly it changes hands. Money in the hands of the unemployed has a much higher velocity than money in the hands of a multi-millionaire.

In addition to being a good source of economic stimulus, and thus benefiting those who are still employed, there is the obvious benefit to those that get the benefits. While we don’t want unemployment insurance to become a backdoor form of welfare and all the dependency issues that raises, unemployment benefits help keep people out of poverty, especially in a deep recession. In 2009, it helped keep 3.4 million people out of poverty, up from 900,000 in 2008, and under 500,000 in 2007.

This is shown in the graph below (from http://www.cbpp.org). Presumably the number will be just as large for 2010 as it was for 2009.

There really is not good way to tell from this report if the decline in the number of people receiving benefits is due to them getting new jobs, or due to even the extended benefits running out. If it is the former, it is very good news. If it is the latter, it just means more people are falling into absolute destitution. That is not good news for either the economy or for social stability. Both the rise in the unemployment duration numbers and the falling civilian participation rate (it stabilized at 64.5% in November, but is still extremely low) would suggest that it is the unhappy latter case that is happening.

While this weeks increase in initial claims is a bit on the disappointing side, the four-week average is still moving in the right direction, and is at its lowest level in over two years. We really need to see the four-week average fall below the 400,000 level and stay there if we are going to climb the Stairway to Heaven of a rapidly falling unemployment rate. If it shoots above 500,000 then we are on the Highway to Hell. Right now, though, it looks like we have a good chance to break out of that rut, but just a chance.

About Dirk van Dijk 112 Articles

Affiliation: Zacks Investment Research

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.

Visit: Zacks Investment Research

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