Initial Claims Still Falling - Analyst Blog

Initial claims for unemployment insurance continued their descent this week, falling by 22,000 to 432,000. This was well below consensus expectations of 460,000 new claims.

The 4-week moving average also fell, but not as sharply, down 5,500 to 460,250. Given the inherent week-to-week instability of the series, the 4-week moving average is a better measure to watch, and the history of it is shown in the graph below (from http://www.calculatedriskblog.com/).

On the continuing claims front, the news was more mixed. Regular continuing claims, which are paid by the states and which run out after 26 weeks, fell by 57,000 to 4.981 million. However, in November, over 38% of all people who were unemployed had been out of work for more than 26 weeks. Thus the regular continuing claims data give a very incomplete picture, and news reports that only report that are highly misleading.

After regular benefits expire, the unemployed start to collect extended benefits, which are paid for by federal funds, part of the ARRA, or the Stimulus Package. Extended benefits rose by 199,000 this week (ignoring the timing, since regular continuing claims data is one week behind the initial claims data, and the extended claims data is one week behind that) to 4.816 million (two largest programs combined). That puts them almost as high as regular claims.

I would not be surprised to see extended benefits exceed regular claims within a few weeks. Thus it seems that the people leaving the continuing claims rolls are doing so simply because their benefits have run out, not because they found themselves a new job.

The caveat about having to look at extended claims as well as continuing claims should not obscure the fact that we have seen very significant progress on the unemployment claims front. Initial claims are now well below where they started 2009 (488,000) and down 242,000 from the 674,000 peak at the end of March. That is a 36% decline from the peak.

The 4-week average is now well below its peaks of the last two recessions as well, and so far has shown no signs of forming a high plateau the way they did following the 1991 and 2001 recessions.

Regular continuing claims, however, remain well above where they started the year (4.487 million), but they too are well below their peak level of 6.904 million at the end of June. Extended claims on the other hand are still rising, and were just 1.570 million a year ago. Extended claims have played a vital role in cushioning the effects of last year’s financial meltdown on the overall economy. I know for many it does not feel like there has been much of a cushion, but things could have easily been FAR worse.

Obviously, those extended claims have cushioned the effect of the downturn on the individuals (and their families) who are getting the benefits. Without the extended benefit program, millions of people would have been left with no income whatsoever. In that case, they would probably defaulted on all of their debts, including their mortgages.

So it obviously has helped the banks like Bank of America (BAC) and the other mortgage market players like Fannie (FNM) and Freddie (FRE) which hold those mortgages. The Federal Reserve is now a major player in the mortgage market as well, due to its ongoing program to buy $1.25 trillion in mortgage-backed paper (the buying program should be completed by the end of the first quarter and is almost 90% done).

The income from extended claims has also allowed people to continue to go to stores to buy at least the basics for life. They are still customers of places like Kroger’s (KR) and Wal-Mart (WMT). Without the program, they would only be customers of the local food bank (where is the food bank bailout, by the way?).

Anyone who says that the ARRA has not helped really needs to go have a conversation with some of those millions of Americans who would be left absolutely destitute without it. They should also consider the number of people who would have been laid off by the likes of Kroger’s and Wal-Mart if they had lost millions of customers.

The level of initial claims is getting close to the level that would be consistent with the economy on-balance adding jobs, but is probably not there yet (below 400,000 would probably indicate net job creation). Still, it is very clear that the economy is no longer hemorrhaging jobs the way it was earlier this year.

The damage has been done, and we still have a very long road ahead of us to bring unemployment back down to acceptable levels, but at least it does not look like the situation is getting any worse.