Initial Claims for Unemployment Insurance fell by 29,000, the second large drop in as many weeks, to 429,000. Relative to a year ago, they are down 20.2% and are 34% below peak levels.
On a week-to-week basis, initial claims can be very noisy and volatile, so it makes sense to look at the four-week moving average of claims. This fell by 11,750 to 455,250.
While the drop in claims is good news, there might be some unusual factors helping it along in the form of seasonal adjustments. Normally at this time of year, the auto companies shut down for a few weeks to do model changeovers. That is not happening this year.
On a non-seasonally adjusted basis, claims actually rose 44,855 to 513,347 (the seasonally adjusted numbers are always rounded to the nearest 1000). There is a very large seasonal factor to initial claims, so generally it does not make a lot of sense to pay that much attention to the non-seasonally adjusted numbers, but this week there is a good case to be made that the seasonally adjustment is overstating the decline.
We will know in a few weeks if this drop is for real or not. If it is for real, it is very good news since we have been stuck in a range on initial claims since the start of this year, after seeing a very large decline in the second half of 2009 (shown in the graph below from http://www.calculatedriskblog.com/).
The current reading is the lowest so far in this cycle. If it holds, it is getting very close to the point that would indicate that the economy is adding enough jobs to be making a meaningful dent in the unemployment rate.
Continuing Claims
The potential for this week’s nice number on initial claims to be an aberration is underscored by the continuing claims numbers, which jumped up by 247,000 to 4.681 million. This is a big change of direction, as the regular continuing claims numbers have been in a steep decline in recent months. A year ago they stood at 6.217 million.
Regular continuing claims are paid by the state unemployment insurance funds and run out after 26 weeks. However, in June, the median duration of unemployment was 25.5 weeks. A measure that excludes almost half of the people it is supposed to be measuring is deeply flawed one.
After the 26 weeks are up, people move on to extended unemployment benefits, which are paid by the federal government. Extended benefits are an extremely effective form of stimulus spending and have been put in place in every recession since the end of WWII. However, now that the long term unemployment situation is worse than it ever has been, and by an extremely wide margin, the Senate cannot muster the votes to overcome a filibuster to continue them.
Long-Term Unemployed Cut Off
As a result, the number of people on extended benefits fell by 255,000 over the last week. While that is still 38.2% higher than were on extended benefits a year ago, it is down by 19.8% or over 1 million in just the last month since the last extension ran out.
The better way to look at the numbers is the combination of the regular claims and the extended claims to see the total number of people getting benefits. Those fell by 8,000 in the last week and is down 341,000 from a year ago.
The cut-off of extended benefits is not only depriving those people who have been out of work for a very long time of their last financial lifeline, but it is also adding to unemployment, probably to the tune of the tens of thousands.
The people who are being cut off have been managing to scrape by benefits that are generally just 60% of their pre-unemployment income up to a cap of about $400 per week, or less than $21,000 per year (this varies somewhat by state). They have probably already depleted their savings, and the savings rate going into this recession was at a record low, so they probably did not have that much to begin with. They have probably already run up their credit card balances. Now with benefits cut off, they have no financial resources at all.
Thus they cannot spend on anything. No going to Wal-Mart (WMT) for toilet paper or school supplies as back to school shopping season starts. They will have to go to the food bank to eat, rather than go shopping at Kroger’s (KR). They certainly will not be going to the barber shop to get their hair cut.
The Vicious Cycle
The net result is less demand, and thus fewer people employed. Those who are older might decide to start Social Security benefits early, but that option is only open to those who are over 62 years old. Some will go on disability. Others will just end up homeless and out of luck.
While some of those who oppose extending benefits say that by “coddling” the unemployed, we simply reduce their desire to look for work, that is not likely the case with the current high number of unemployed and low number of job openings. Consider the following graph from this source. Yes, in recent months the situation has gotten better with more job openings and fewer unemployed, but the ratio of unemployed to openings still far exceeds anything the country had ever seen before the Great Recession.
Cutting off extended benefits is not just heartless, it is very bad economics and is making the unemployment situation worse. By slowing the economy, it will also result in lower tax collections, so it is not even that effective in reducing the budget deficit.
Those pressing this agenda are also having their seriousness in deficit reduction undermined when they say that continuing the tax cuts for the wealthiest Americans don’t have to be offset with either spending cuts or higher taxes elsewhere. Of course, less progress on unemployment probably the objective of those who are determined to cut them off, since the worse the economy is come November, the better their prospects are in the mid-term elections.
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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