Initial Claims for Unemployment Insurance fell by 6,000 this week to 462,000. However, the 4-week moving average, which is generally considered a better measure given the high degree of volatility in the weekly numbers, rose by 5,000 to 475,500.
Starting about a year ago, when the weekly level was at 657,000 and the 4-week average was at 646,750, initial claims began a steep decline that lasted until about the end of 2009, but so far this year they have been trending higher again.
The shape and pace of the decline last year was very similar to what happened after the recessions of ancient times, meaning before the 1991 recession. Following the 1991 and 2001 recessions, initial jobless claims followed a very different path, where after an initial drop they found a high plateau that lasted for well over a year.
Hopefully, the more recent rebound is not the start of that sort of high plateau again. Those were associated with very long periods of “jobless recovery.” If one matches up the history of employment gains and losses, such as were released last week with the initial jobless claims data, it indicates that we probably need to see the 4-week average get down in the neighborhood of 400,000 to indicate that the economy is on-balance adding jobs.
Continuing Claims
The news on the continuing jobless claims front was mixed. Regular claims for unemployment insurance are paid from the state unemployment insurance pools. Those run out after 26 weeks. While last month we did see a decline in the average duration of unemployment, it is still at 29.7 weeks. The median duration fell for the second month in a row, but is still at 19.4 weeks.
In total, 6.133 million people have been out of work for more than 26 weeks. For those people, after the state benefits run out, they move over to extended benefits which are paid for by the federal government.
Regular state continuing jobless claims rose by 37,000 last week to 4.558 million. That is 13.2% below the 5.253 million level of a year ago. Extended federal claims, on the other hand, fell by 175,000, but are now at 5.691 million, or 24.9% above the level of regular state claims. They are also far more than twice the 2.074 million level of a year ago.
Next week, look for a big drop in extended jobless claims, but it will not be because of any improvement in the economy. It will be due to the action of a single senator from Kentucky who held up the extension of benefits (and then whined about how doing so caused him the great hardship of missing a basketball game on TV). This caused hundreds of thousands to temporarily lose their final income lifeline before benefits were restored.
Why Cutting Extended Benefits is Wrong
Cutting off extended benefits is not just mean, it is also extremely bad economics. There are those that claim that extended benefits are making the problem worse by removing the incentive for people to find a new job. That might be the case if the economy was booming and the unemployment rate were at 5%. However, with more than five job applicants for every available job opening, that is not the case today.
Who really wants to put “nothing” for 9 months or a year on their resume? Do people really think that will make them more attractive to potential future employers? Or do those who claim the disincentive effect really think that this is a plan by the unemployed to retire at age 35 and live forever on extended unemployment benefits, that in many states are less $400 a week?
What would happen to those 5.691 million people if extended claims were eliminated? They would simply have no income at all. They have already been living for six months on a far lower income than they were when they were employed. During those six months they have probably already depleted much of their savings.
In the run-up to this downturn, the savings rate was at near record lows (the only lower time in history was during the absolute depths of the Great Depression), so the currently unemployed, in general, probably didn’t have much in the way of savings to begin with, particularly if they were not in the top 10% of earners before they got their pink slips.
What savings they did have was probably inside a 401-k or IRA. That means when they draw on it, not only is it taxed as ordinary income, but that they have to pay a 10% penalty on it. Of course it also means that they are going to have a much delayed and more frugal retirement than they would have it they had not had this bout of unemployment.
With no income, and savings depleted, they could not shop for groceries at Kroger’s (KR), or if they did, they would be doing it with food stamps. They would for the most part turn to the food banks, but they are already very overstretched (yes, we need a food bank bailout). They have probably already run up their credit card balances, but would have no hope of paying them off. That would not exactly be great news for American Express (AXP).
With one in four houses with mortgages now underwater, they do not have the option of drawing on their home equity (if they are homeowners) the way they did in the previous recession. Even if they are not under water, if they have less than 10% equity in the house, it is extremely unlikely that any bank would give then a homeowner equity line of credit (HELOC) or second mortgage. Indeed, they are likely to just stop paying their mortgage and wait for the sheriff to show up at the door.
In many areas people can live rent- and mortgage-payment-free for more than a year before the deputies knock. That’s good for their survival, but it is not good for the whole mortgage complex, from Fannie Mae (FNM) to Bank of America (BAC) to the mortgage insurers like MGIC (MTG).
Those $400 a week checks get spent, and spent fast. As they do, the money flows back into the economy and keeps other people at work. They add to aggregate demand, and low aggregate demand is the reason the economy is in a slump (or at least the transmission mechanism). In fact, the Congressional Budget Office scores extended benefits as one of the most effective stimulus programs out there in terms of jobs created or saved per dollar spent.
In Perspective
I live in a depressed Midwestern city (Dayton, OH). Things are bad here. I have also been to Delhi, in India. Things are much better here than there. However, if we simply cut people off and they have no income at all, it will not be too long before Dayton starts to look like Delhi, without the amazing Red Fort and other architectural masterpieces.
Had we not passed the ARRA, the economy would be in far worse shape than it is today. This is not the time to be pulling back on fiscal stimulus. Yes, the long-term structural deficits need to be addressed, but if the economy is allowed to deteriorate from here for lack of stimulus, tax revenues will fall, and we will still have short-term deficits, and most likely the structural deficits will get worse.
The Federal stimulus is also being offset by anti-stimulus at the state and local levels, which are constitutionally (all except Vermont) not allowed to run operating deficits. The ARRA helped plug some of that gap last year, but the states are in an even bigger hole this year.
This will lead to layoffs of teachers, state troopers, local police, firefighters and prison guards. It will mean that waits at the DMV get even longer. It means kids who get thrown into the foster care system will get even less support. Class sizes in K-12 education will go from 25 to 35 in many areas. State college tuitions will rise, and price many students who are capable of performing well in higher education out of the market.
It will mean big cuts in Medicaid funding for the poor, and as a result, people are likely to die. Have states made bad decisions in the past? You bet they have. The most notable of these is in the state pension area, where benefits are often extremely generous. Those, however, are contractual, and any move to cut them (at least for those who are already getting them or are vested) would be unconstitutional.
Unemployment benefits are a palliative, but they also help those who still have jobs keep their jobs. They are not a substitute for real creation of jobs, either economically or psychologically. A direct federal jobs program might be more effective, although what we really need to see are private sector jobs.
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.
