Initial Claims for Unemployment Insurance jumped to 464,000, an increase of 37,000. This pretty much confirms that what we suspected that week was true: last week’s big drop was a fluke due to seasonal adjustment issues surrounding normal auto plant summer shut downs that didn’t happen. It is for exactly these sorts of reasons why it makes sense to focus on the four-week moving average that smooths out some of the noise and volatility in the weekly numbers.
The four-week average rose by 1,250 to 456,000. A year ago, the four-week moving average was at 569,250. As the graph below (from http://www.calculatedriskblog.com/) shows, the four-week average has been in a very tight range so far in 2010 after a big drop in the last half of 2009.
This is the sort of pattern that developed after the past two recessions — periods that were described at the time as “jobless recoveries.” By contrast, in earlier recessions, once initial claims started down they kept falling until they got to around the same level they were before the recession started. The rebound in claims this week is disappointing, but not all that unexpected.
Continuing Claims
On the continuing claims front, the news was — at least on the surface — much better. Regular continuing claims, which are paid for by the state unemployment insurance funds, and last only 26 weeks, fell by 223,000 to 4.487 million, and are 26.7% below the year-ago level.
But there are a few things to keep in mind. The continuing claims data is one week behind the initial claims data. Thus the big drop this week really corresponds to the big drop in initial claims last week, not to the increase this week in initial claims. Second, is that it is only for those people who have been out of work for 26 weeks or less. However, in June, half of all the unemployed had been out of work for 25.5 weeks or more. Thus it hardly gives a complete picture of the state of unemployment.
The Recent Saga of Extended Benefits
After 26 weeks, people move on to extended unemployment benefits, which are paid by the federal government. The federal government does this for both humanitarian reasons and because it is good economics to do so during a recession. The long-term unemployed can be counted on to immediately go out and spend the money on things like groceries at Kroger’s (KR) or kids clothes at Wal-Mart (WMT), thus pumping money into the economy and keeping existing jobs.
The vast majority of economists agree that on a dollar spent per job saved or created basis, extended unemployment is one of the most effective ways to stimulate the economy. That is why they have been extended in every recession since the end of WWII. After more than a month of delay, the Senate finally extended the benefits that had started to lapse at the end of May.
However, the data on extended benefits is a week behind regular continuing claims and two weeks behind initial claims. This week’s extended claims data shows a decline of 368,000 to 3.929 million, although that is still 14.0% higher than a year ago. If one ignores the weekly timing differences, the total number of people receiving unemployment benefits, both regular and extended is 12.0% below year-ago levels.
In a couple of weeks, though, the data is going to start picking up the people coming back on to extended claims that fell off while the Senate was constipated on this vital issue due to a filibuster. It took the swearing in of the replacement for Robert Byrd to break the filibuster.
The graph below (from this source) shows the Great Recession and the previous three recessions. Note not just the length of time between when extended benefits started and when they were removed, but the length of time between when unemployment peaked and when the extended benefits were removed.
Clearly keeping extended benefits in place for a long time and until there has been substantial progress in the unemployment rate has been the historical norm. Despite what those who were filibustering the extension of benefits were saying, there is NOTHING extraordinary about continuing to extend them when the unemployment rate is still at 9.5%, as it was in June.
Unemployment benefits pay about 60% of pre unemployment income, up to a cap of about $400 per week. While we don’t want to see extended benefits turn into a “back-door welfare system,” there is little danger of that happening at that sort of benefit level.
Existing Jobs vs. the Unemployed
There are now about 15 million people who are unemployed and about 3.3 million job openings (May data from the JOLTS report). Simply telling the unemployed to “get a job” is not a solution. If they could, they would.
Cutting them off would leave them with no income at all. Most people had little in the way of savings going into the recession (the savings rate was at an all-time low) so their savings are probably already gone by this point. Cutting off benefits will result in more houses being foreclosed upon, thus adding to the supply overhang that is choking the housing sector.
Normally the housing sector is what pulls us out of recessions. It is not happening this time due to the huge supply overhang of the current shadow inventory of foreclosed — or about to be foreclosed — houses. Cutting off benefits simply made the problem worse.
Passage of the extended benefits package is good news for the economy. However, it was a pathetically small bill. It had to be dramatically scaled back to gather enough support to break the filibuster.
The economy still needs more fiscal stimulus. Doing things like extending aid to the states so they don’t have to do things like eliminate “Meals on Wheels” programs for the elderly and disabled would do a lot to help the economy (and in the long run save a lot of money, since help at home is a lot cheaper than putting those people into nursing homes).
That would be much more effective than things like the homebuyer tax credit, which simply rewarded people for doing what they would have done anyway, but shifting the timing of when they did it. As the hangover in housing shows, that program was a total flop, even if it is generally described in the papers as “popular.”
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.
