We got some good news as Initial Claims for Unemployment Insurance fell by 10,000 last week to 453,000. However, it is not good enough. If one factors in the upward revision to the previous week’s number, the decline is only 7,000.
Since the week-to-week numbers can be noisy and volatile, it is generally better to look at the four-week moving average to get a better sense of the overall trend. This is tracked in the graph below (from http://www.calculatedriskblog.com/).
After a massive and steep decline starting in April of last year, and continuing through New Year’s, the trend of initial jobless claims has become very erratic. This is starting to look like a replay of what happened after the last two recessions when after a steep initial decline, initial claims remained on a high plateau for a very long period of time. Those periods coincided with jobless recoveries.
The four-week moving average increased by 1,750 this week to 459,000. That, however, is still a huge improvement over the 616,000 level of a year ago. If we are going to make a serious dent in the unemployment rate (currently at 9.9% for April, May data due out tomorrow) we probably need to see the four-week moving average fall below the 400,000 level and stay there.
Continuing Claims
The news on continuing claims was a bit more disappointing. Regular continuing claims rose by 31,000 to 4.666 million. However, they have been in a steep downtrend of late, and a one-week blip does not make a trend. A year ago they were at 6.515 million, so over the course of the year we have seen a 28.4% decline.
However, regular continuing claims do not tell the whole story, not by a long shot. Regular claims are paid by the state unemployment insurance funds, and last for only 26 weeks. In April, 45.9% of all of the unemployed had been out of work for longer than that.
After 26 weeks, people move over to the extended claims programs, which are paid for by the federal government as part of the Stimulus Package. In the current report, extended claims were up 57,000 to 5.395 million. While regular continuing claims might have dropped over the last year, the same is not true for extended claims. They have more than doubled from last year’s level of 2.663 million.
Thus, a better way to look at things is the total number of people getting unemployment benefits. On that basis, the number of people getting benefits is 88,000 higher than a week ago, and 883,000, or 9.6%, higher than a year ago.
The Stimulus’ Positive Effect
According to the non-partisan Congressional Budget Office (CBO), the stimulus has been very effective in getting the economy back on track (see: http://www.cbo.gov/ftpdocs/115xx/doc11525/05-25-ARRA.pdf) and resulted in the size of the economy being between 1.7% and 4.2% larger than it otherwise would have been. If the GDP had been smaller because the stimulus did not happen, then so too would have been the tax base. Thus the net cost of the ARRA is significantly less than the $787 billion over 3 years that was authorized (although still a very large amount, but more like $500 billion).
Also according to the CBO, extended claims are one of the most effective tools in the arsenal in saving or creating jobs on a per-dollar-spent basis. This is in addition to the obvious humanitarian benefit of helping those who would otherwise be without any income at all.
After 26 weeks of only getting about 60% of what you were earning prior to being laid off (up to a maximum of about $400 a week, although the numbers vary by state), most people would have already depleted most of their savings — particularly any savings outside of sheltered retirement accounts. The may have already started to pull money out of their IRAs and 401-ks, even though doing so requires them to pay taxes on the money as if it were earnings, and an additional 10% penalty on top of that. That is quite a blow to people’s long-term retirement security. They have also probably run up their credit card balances.
If benefits ended abruptly after six months, those people would not even afford to buy the basics of life at deep discounters like Big Lots (BIG). They would have no hope of paying their mortgages if they were homeowners, and would most likely either sell (putting more houses on the market, further depressing housing prices) if they still have positive equity in their homes.
They could borrow against the equity in their homes, which was a common strategy in previous downturns, but with 24% of all houses “underwater” and another 4% with less than 5% positive equity, that option is not open to many. That is especially true if you consider that the areas with the highest levels of unemployment are also generally those with the highest percentage of homes underwater. (Ironically, the places with the most underwater homes are in the desert, notably in Nevada and Arizona.)
Many would try to survive simply by not paying their mortgage and waiting for the sheriff to show up at the door, which in many areas of the country can take more than a year these days. While such a move might help those people to stretch their last few financial resources, it would hardly be good news for just about any firm in the mortgage complex, ranging from the wards of the state like Fannie Mae (FNM) and Freddie Mac (FRE) which would simply have much larger losses, to the major banks with big mortgage operations like Bank of America (BAC). If we try to save money by cutting off extended benefits, it is likely that we will simply have to spend more money on losses at Fannie and Freddie, so the savings would be an illusion.
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.
