Initial Claims for Unemployment Insurance rose by 13,000 last week to 462,000. We just can’t seem to get out of the “trading range” that initial claims have been in for the last year.
Last week, hopes were raised that we might finally be showing some real progress, as claims fell for the second week in a row and for the sixth time in seven weeks. This week’s numbers put any such celebration on hold. 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 rose by 2,250 to 459,000.
After declining sharply in the second half of 2009, the four-week moving average has been stuck in a tight trading range. In mid-August, the weekly number hit 500,000 and threatened to break out to the upside from the range; the decline over the last month and a half month brought us down to 449,000. We seem to be stuck in a pseudo-recovery.
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. In hindsight, the run-up to 500,000 seems to be mostly a function of the Census workers being laid off (they are almost all gone now, and the Census was completed quicker, and at less cost than anyone had expected).
As that effect waned, we returned to the previous baseline. Relative to a year ago, the four-week moving average is down by 75,000 or 14.0%. The graph below (from http://www.calculatedriskblog.com/) charts the path of the four-week average since the start of the century.
Continuing Claims
The data on regular continuing claims was positive. Regular continuing claims for unemployment insurance fell by 112,000 to 4.399 million. They are down by 1.555 million or 26.1% from a year ago. Regular claims are paid by the state governments, and run out after just 26 weeks.
However, in September, half of all the unemployed had been out of work for 20.4 weeks (down from 25.5 weeks in June), and 41.7% had been out of work for more than 26 weeks. Clearly a measure of unemployment that by definition excludes 41.7% 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. These benefits can increase the total amount of time people get benefits to up to 99 weeks (depending on the unemployment rate in your state). The Map below (from here) shows the maximum length of benefits by state.
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. Those fell by 340,000 this week to 4.795 million but are up by 758,000, or 18.8% over the past year.
A much better measure is the total number of people getting benefits, regardless of which level of government pays for them. On that basis, then, claims fell by 452,000 in the last week, and are down by 797,000 or 8.0% over the last year.
While 99 weeks is a fairly long time, just under two years, it is not forever. It is less than the amount of time since the failure of Lehman Brothers set off the financial meltdown. While we were already in a recession at that point but actually didn’t officially know it. It was after the meltdown that businesses started to cut jobs at an unprecedented pace.
Many of those people still have not found jobs, but they are now aging out of even the extended benefits. By this point, it is a pretty good bet that they have depleted their savings and run up all the debt they can in trying to make ends meet. Usually, unemployment benefits pay 60% of the income you got while working, but only up to a cap of $400 per weeks (I say usually because it varies some what from state to state). That works out to be just $20,800 per year, or less than the poverty line for a family of four.
The vast majority of economists agree that extended unemployment benefits are among the most effective forms of economic stimulus. Although some do worry 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. The people who get them tend to spend the money quickly on basic needs.
This in turn keeps customers coming in the door at Wal-Mart (WMT) and Big Lots (BIG). 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. People can buy food at a Kroger’s (KR) rather than having to rely on overstretched food banks. 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.
These customers keep the people at Wal-Mart, Big Lots 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.
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.
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 back door 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. Presumably the number will be just as large for 2010 as it was for 2009.
There really is no 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.
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.
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