After five straight weeks of declines, initial jobless claims for unemployment insurance rose by 17,000 last week to 474,000 from an unrevised 457,000 the week before. However, as the higher levels of a month ago roll over, the four-week jobless claims moving average continued its decline, dropping by 7,750 to 473,750.

Given the weekly volatility in this series, it is best to follow the four-week average. Jobless claims for this week was a disappointment as the consensus expectation was for another small decline to 455,000. Still, if one takes a step back to look at the longer-term picture, the jobless claims improvement has been impressive.

As is shown in the graph below (from http://www.calculatedriskblog.com/), the recent jobless claims decline in the four-week average has been impressive. Back in April, the average peaked at over 650,000, so we are about half way back to a healthy level of jobless claims, at about 350,000.

So far there is no sign of the initial jobless claims series finding a high plateau the way it did in (and immediately after) the last two downturns. This holds out the promise that perhaps — just perhaps — this recovery will not be quite as jobless as is now feared. Both the current week and the four-week average are now comfortably below their year-ago levels of 552,000 and 530,500, respectively.

Still, the current level of jobless claims is not yet low enough to suggest that the economy is on balance creating jobs rather than losing them. We probably need to see the four-week jobless claims moving average drop below the 400,000 level for that to occur. But if the pace of decline in jobless claims over the last few months can be maintained (in mid-September, the four week average was at 554,250), it is possible for us to get to that level by the middle of February.

That would be very welcome news on the jobless claims front indeed, not only for the almost six million people who have now been out of work for more than six months, but for the economy as a whole. It means that they would actually start to have some disposable income and could spend on things that are not absolute necessities again. They would also have the personal cash flow needed to do things like pay their mortgages and their credit card bills. This would greatly improve the asset quality of the banks like Bank of America (BAC) and Capital One (COF).

The news on the continuing jobless claims front was mixed. Regular continuing jobless claims — the ones that are paid by the states and which run out after six months — dropped by 303,000 to 5.157 million. That is still well above the year-ago level of 4.354 million, but is down sharply versus the peak that was set back at the end of June at 6.904 million — a 36.9% decline.

Regular jobless claims, however, do not tell the whole story, especially in this downturn where the duration of unemployment has been a particularly severe problem (see “Unemployment Duration Still Rising”). After the regular state benefits are exhausted, people move over to extended jobless claims that are paid by the federal government, in large part as part of the stimulus program. Combining the two largest of these jobless claims programs, they are now helping a total of 4.586 million people, up 137,500 from last week.

Still, the reduction in regular claims this week was far larger than the increase in regular jobless claims, which suggests we are making progress overall (unless, of course, there are a large number of people who are exhausting their extended benefits, but since the benefits were recently extended again, that seems unlikely). The extended jobless claims numbers are not in any danger of falling below year-ago levels any time soon. Last year there were less than 753,000 people getting extended jobless claims benefits (remember there was a small stimulus package passed in the spring of 2008).

The extended jobless claims have been of tremendous humanitarian benefit to those who are without jobs and have been so for a very long time. What would these 4.5 million people have done after their regular benefits had expired when there are still more than six people looking for work for each job opening? How much real poverty are we willing to stand for in this country? Already, one out of every four children in this country is on food stamps.

Aside from just the humanitarian and social stability benefits of the extended benefit program, it is also a very effective program for preventing further deterioration of the economy. The money people get allows them to actually go to Wal-Mart (WMT) to buy groceries rather than having to rely on our very overstretched network of food banks (please give generously). This keeps the employees at Wal-Mart and Kroger’s (KR) employed, not to mention the drivers employed who deliver the goods to Wal-Mart, and occasionally even U.S. workers who make the products they buy.

Money in the hands of the poor generally has a higher multiplier effect on the economy than the same incremental dollar placed in the hands of the wealthy. This is because the poorer person is more likely to send the dollar quickly. I am not sure if the typical basket of goods that someone near the bottom of the income distribution is more or less directly labor intensive than that of someone at the top of the income distribution, but I suspect it might be as well (might be a good PhD dissertation topic, for any Economics Grad Students out there who might be reading this).

While the initial jobless claims were disappointing, the rest of the jobless claims report was encouraging so overall I would count this as a small positive, or at worst a neutral report.

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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