After about two months of moving in the wrong direction, we finally got some good news on the Initial Claims for Unemployment Insurance front. Initial claims dropped by 29,000 to 469,000. Prior to the start of 2010, we had been in a steep downtrend, and we are well below the 643,000 level of a year ago.
The number was just slightly better than the consensus expectations of 470,000 new claims. This week’s decline brought the 4-week moving average down by 3,500 to 470,750. The weekly numbers can be very volatile, so the four week moving average is a better overall gauge of where we stand, but right now both measures are close together.
The chart below (from http://www.calculatedriskblog.com/) shows the history of the 4-week moving average. Note the relationship between the end of the blue recession bars and the level of claims. The first three recessions shown on the graph followed a very different pattern than the last two.
Until the rebound in claims over the last two months, it looked like we were following the earlier pattern rather than the path of the post 1991 and 2001 recessions where after an initial dip, claims remained high for years as we went into a prolonged “jobless recovery” phase. If one matches up the initial claims data with the job growth, and do a little adjusting for population growth, data (to be released for February tomorrow) it indicates that we need to see initial claims get down to close to the 400,000 level to indicate that the economy is on balance actually creating jobs. We still have a ways to go.
The news on Continuing Claims was more mixed. Regular state paid claims for unemployment insurance, which run out after 26 weeks, dropped by 134,000 to 4.500 million. That number is now significantly below the year-ago level of 5.074 million. It does not come close to telling the whole story, though.
One of the “signatures” of this recession relative to previous downturns is the extraordinary duration of unemployment. In January, half of all the unemployed had been out of work for more than 19.9 weeks, and the average length of time people who out of work have been without a pay check was 30.2 weeks.
More to the point of the Continuing Claims numbers, 41.3% of the unemployed have been out of work for more than 26 weeks, the point at which state claims run out, and without extended claims (which are largely paid for through the Federal government and the ARRA, aka the Stimulus Act) would be left with no income at all. (Those duration of unemployment numbers are some of the more important details to look at when the jobs numbers for February are released tomorrow; don’t just look at the unemployment rate and the net number of jobs gained or lost). A number that totally ignores more than 40% of the issue that it supposedly measures is obviously deeply flawed.
Extended Claims rose by 197,500 to 5.866 million (combining the two biggest programs). That is far above the year-ago level of 1.932 million. Thus there are a total of 10.366 million people getting unemployment benefits.
Be Mindful of the Timing Difference
There is a bit of a timing difference in the numbers. The regular continuing claims are a week delayed from the initial claims numbers and the extended claims are a week behind the regular claims and thus two weeks behind the initial claims numbers. Normally I use the convention of referring to “this week” for all three sets of numbers, because I’m basing it on the week the data was released. However, that difference is likely to change significantly over the coming weeks.
We will not see the effects of Sen. Jim Bunning’s (R-KY) bean ball aimed at the head of the unfortunate Americans who are out of work for another two weeks. He singlehandedly held up an extension of the extended claims and as a result hundreds of thousands of the unemployed temporarily lost their extended benefits. The Senate was eventually able to over come this, and passed the extension with overwhelming bi-partisan support, but it is highly likely to cause a big blip in the extended claims numbers in a couple of weeks. When you see this, don’t be fooled into thinking that those people all got jobs.
Those extended benefits have been a vital lifeline not just to the people getting the checks. Without them, they would be left with no income at all and would have had to rely on charity. Instead of shopping for groceries at Wal-Mart (WMT) or Kroger’s (KR), they would have to rely on the already overstretched food pantries around the country…or starve.
Savings Rate Low Prior to Downturn
Of course, they could draw down their savings, if they had any. By the time someone has been out of work for more than six months it is likely that they have already dipped into their savings. After all, unemployment insurance checks are significantly smaller than the paychecks they replace. While people’s expenses go down somewhat when they lose their jobs (not as likely to eat out at lunch, no commutation costs, etc.) the amount of the decline in expenses is no where near the shortfall in income relative to getting a paycheck.
In previous downturns, if they were homeowners they could tap the equity in their homes to tide them over. However, today almost one in four homes with mortgages on them are “underwater.” Millions more are so close to the water line that no bank would rationally lend them anything on it.
Leading up to this recession, the savings rate had been at an all-time low (OK, it briefly got lower in 1932 in the depths of the Great Depression), so it is not like people were coming into this downturn with a healthy cushion. If they had any savings, they were most likely in a 401-k or IRA. That means that anything they take out not only gets taxed as ordinary income, but they have to pay a 10% penalty on it. A temporary (but extended) loss of employment is leading to a permanent reduction in their standard of living and even to the prospect that they will ever be able to retire at all.
Extended Benefits Remain Important
The extended benefits put money into the hands of the people who are most likely to spend it. As they do, they keep the people at the Wal-Mart employed. They are also able to continue paying their mortgage, or at least more of them are able to than would be the case without the unemployment checks. That means fewer foreclosed houses on the market, which means less pressure on housing prices, which in turn means fewer people who end up underwater on their homes. That is good for their neighbors as well as for the Financial institutions like Bank of America (BAC) and Fannie Mae (FNM) that have an interest in their mortgage.
Obviously cutting off extended claims would have severe humanitarian consequences for the people who get cut off. It would also have very bad effects on the economy as a whole. Just to be clear, though, while extended claims are important medicine for the economy, they are a palliative, not a cure. Giving morphine to someone with third-degree burns does not cure the burn, and creates a danger that he could become addicted. However, to deny him morphine would be cruel, and could cause him to go into shock, which could kill him.
We need a cure (more jobs) in addition to the pain killer of extended benefits. That medicine is likely to be expensive and will add to the budget deficit, either through lower taxes (for example a holiday on the employer-side of payroll taxes for incremental new hires) or through direct spending (the actual jobs would likely be in the private sector, but working on Federal contracts).
There is work that needs to be done in this country, and there are lots of people available to do that work. The production that is lost from unemployment is lost forever and cannot be regained. We need to put people back to work and get the work the country needs done, done.
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.
