We got mixed news in the Initial Claims for Unemployment Insurance report. This week, initial jobless claims fell by 8,000 to 470,000, and last week’s figure was revised down to 478,000 from 482,000. However, the level was well above the consensus expectation of 450,000.

The decline and the revision to the prior week were not enough to keep the four-week moving average from rising. It increased by 9,500 to 456,250. Given the weekly noise in the numbers, the four-week moving average is generally considered a more reliable indicator.

This is the second week in a row that the four-week average has risen. As the graph (from http://www.calculatedriskblog.com/) below shows, the four-week average has been in a steep descent since it peaked in mid-April, and until this point has not shown any signs of forming a high plateau the way it did following the prior two economic downturns. Let us hope that the upticks over the last two weeks does not indicate that such a plateau is forming.

We probably need the four-week moving average to get down to close to 400,00 to indicate that the economy is on balance adding jobs. Relative to peak levels of over 650,000, or even the year-ago level of 547,000, we are getting pretty close to that point, but are not there yet, and progress seems to have stalled. The numbers are always a bit flaky around the holidays, and the four-week average still incorporates them, so perhaps we should not get too worried…yet.

Continuing Jobless Claims Improve

The news was better on the continuing jobless claims front. Regular continuing jobless claims, which are paid for by State unemployment insurance funds and run out after 26 weeks, fell by 57,000 to 4,602 million. However, with almost 40% of all the unemployed now out of work for more than 26 weeks, regular claims do not come close to telling the whole story. Looking at them in isolation is a serious mistake.

After regular benefits expire, people move over to extended benefits, which are mostly funded by the ARRA, also known as the Recovery Act or Stimulus Package. Those now number 5.612 million (combining the two largest programs), or more than a million more than regular continuing jobless claims. There was good news there as well, as extended claims dropped by 305,000 this week (actually two weeks ago, and regular claims are one week ago, but released today). Without those extended benefits, those people and their families would be left with no income at all.

After 26 weeks of reduced income (relative to what they were earning when employed) on regular benefits they have probably already drawn down much of their savings and run up their credit card balances. They would be far more likely to default on their mortgages if their income fell to zero.

More Strain on Housing Market?

This would make the housing situation much worse. That would not be good for firms throughout the mortgage complex from Fannie Mae (FNM) to the mortgage insurers like MGIC (MTG) to the major mortgage issuing and servicing banks like Wells Fargo (WFC) and Bank of America (BAC).

With the extended benefits, the unemployed can still afford to shop for basics, although they may end up being steady customers at the Salvation Army rather than at JC Penney’s (JCP). Still better that they are shopping in the Salvation Army thrift stores than sleeping in Salvation Army homeless shelters, which is where they would be without the extended benefits. Better not only in a humanitarian sense, but better for the overall economy as well. The dollars they spend go back into the economy, and in the process help keep other people employed.

Progress Being Made…Slowly

The progress on both regular and extended claims is good news, but let’s keep the longer-term picture in mind. Regular jobless claims are just slightly below the year-ago level of 4.673 million, but extended jobless claims are aver three times the year-ago level of 1.788 million. Those higher extended jobless claims are responsible for one of the biggest single increases of any line item in the Federal Budget if we compare the first three months of fiscal 2010 to the first three months of fiscal 2009, rising by $19.0 billion to $35.7 billion.

It would be better not to have to spend so much money on extended jobless benefits given the massive deficits and towering federal debt. However, given the level of unemployment, especially long-term unemployment, it really is money that needs to be spent.

Unemployment is a double-whammy on the budget, since not only does it cause expenditures to rise, but if people are not working, they are not paying income taxes. In the first quarter of this fiscal year, individual income tax collections are down by $47.6 billion. That impact (not just from the unemployed but also due to people earning less but still working, and from various tax cuts) from falling tax revenues is responsible for 2.5x as much of the increase in the deficit as the direct expenditures on extended claims are.

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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