Initial Claims for Unemployment Insurance fell 4,000 in the last week to 444,000. However, last week’s numbers were revised up by 4,000, so in many respects they were unchanged.
The four-week moving average declined by 9,000 to 450,500. There is a fair amount of volatility in the week-to-week numbers, and the four-week average helps sort out the noise from the real information. As the chart below shows, after peaking in April of 2009 above 650,000, the four-week average was on a steep decline until the end of the year. Since then the four-week average has hovered in a tight range between 440,000 and 470,000.
This sharp initial decline, followed by a lengthy period of a high plateau, is reminiscent of the pattern that followed the recessions of 1991 and 2001, and is distinctly different from the sharp and smooth declines that followed earlier recessions. The plateaus that followed the last two proved to be far longer than the current one, and the move towards the lower end of the range gives hope that this period will be short lived.
The still high level of initial jobless claims is somewhat at odds with the other employment data we have been getting. The 290,000 jobs, including 231,000 private sector jobs, we gained in April would be more consistent with a level of initial claims well below the 400,000 level. It will be interesting to see if the April jobs data gets revised down in the May report.
It is also inconsistent with the numbers from the JOLTS survey for March (see Still a Lack of Hiring, Not More Firing), which showed the level of layoffs in March was at one of its lowest levels in the last decade. Still, the decline from last year, when the four-week moving average was at 621,250, is very encouraging.
Continuing Claims
The picture on continuing claims was more mixed. The level of regular continuing claims rose by 12,000 to 4.627 million from 4.615 million. That is also down sharply from a year ago when continuing claims were at 6.389 million. That’s a drop of 27.6%.
However, regular continuing claims are the ones paid for by the states from their unemployment insurance funds, and generally run out after 26 weeks. One of the trademarks of this recession is the extremely long duration of unemployment once someone losses his or her job.
In April, 6.716 million people, or 45.9% of all unemployed, had been out of work for more than 26 weeks, and half had been looking for a job for 21.6 weeks. Clearly a measure that by definition excludes almost half of all the people it is measuring does not give a very complete picture. After the regular claims run out, people move over to extended claims, which are paid for by the Federal government as part of the Stimulus Program.
There the short-term picture was better, with extended claims (the two largest programs combined) recording a drop of 200,000 in the last week to 5.356 million (note that regular continuing claims are reported one week behind the initial claims, and the extended claims are two weeks behind initial claims, so when I say last week I mean from what was reported a week ago.) Longer term, however, extended claims are more than double the 2.378 million level they were at a year ago.
How Many Receive Benefits Overall?
A better way to look at things is the total number of people getting unemployment benefits, both regular and extended. On that basis, claims are down 188,000 on the week but are up 1.216 million, or 13.9%, from a year ago. However, more of the burden has shifted to the federal government from the state governments, and has helped to alleviate the severe budgetary constraints that most of the states find themselves in.
That has made unemployment payments one of the fastest rising areas in the federal budget. So far this fiscal year (ends 9/30/10), we have spent $109.948 billion from the federal budget for unemployment insurance, up $52.011 billion, or 89.8%, from the total to this point in the last fiscal year. When the economy is not in a deep recession (or its aftermath), the amount spent on extended benefits is normally zero. Thus, extended unemployment benefits are one of the main contributors to higher budget deficits (although on a fiscal year-to-date basis, the deficit is actually down slightly from a year ago at $799.7 billion versus 802.3 billion).
This spending is needed, though, and not just for humanitarian reasons (although those are important). Extended claims are also a very effective economic stimulus tool, and one that the non-partisan Congressional Budget office has scored as one of the most effective at creating or saving jobs on a per-dollar-spent basis.
By the time someone has been out of work for more than six months, particularly if they thought that they would get a new job after two or three months, they have probably used up most of their savings and have probably already run up their credit cards. After all, there are plenty of things that you would continue to spend money on if you thought you would be working again soon, that you might have cut off sooner if you had know just how long you would have been out of work.
While things vary a bit by state, in most states unemployment insurance will pay about 60% of your working income, up to a maximum of about $400 per week. It is pretty hard to cut 40% of your spending overnight; particularly when for most people a large portion of their spending is fixed on things like the mortgage and car payments.
Mortgages No Longer an Option
If there were no extended claims, then these people would have no income at all — and with savings depleted and credit lines used, they would have zero financial resources. In years gone by, those who were homeowners could use the equity in their houses to tide them over, but in the first quarter, 24% of all houses with mortgages were under water, and an additional 4% had less than 5% positive equity. For those people, borrowing against the house is not an option.
What is an option if they didn’t have extended benefits would be to simply stop paying their mortgage and wait for the sheriff to show up at the door. In many areas of the country, that can take well over a year. However, if everyone were to do that, the new capital that the banks have raised to get out from under the TARP program, and which they have been able to generate due to the very steep yield curve, would quickly be depleted. We would soon be back to the “bad old days” of October 2008. Bank of America (BAC) and Citigroup (C) would once again be basket cases on the verge of collapse, and with them the whole world financial system.
It is not that people are not putting this into practice now — after all, it is the economically rational thing to do if your house is deeply underwater — but that there would be far more of them doing it. People not being able to pay their mortgages is at the heart of the reason that Fannie Mae (FNM) and Freddie Mac (FRE) continue to bleed billions and billions each quarter with no end in sight.
The Ripple Effect
Also, if people had no income or other financial resources, they would not be able to shop for even the most basic needs at Wal-Mart (WMT), which would lead to layoffs there and up and down the Wal-Mart supply chain. Those people would then be getting unemployment insurance until their 26 weeks were up, and the downward cycle would continue.
The point of extended claims is to help break this cycle, not to become a new permanent welfare system. There will come a time when we need to scale back on the extended benefits, but with the unemployment rate still at close to 10%, now is not the time to do so.
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.
