Initial claims for unemployment insurance fell back towards the bottom of the “trading range” they have been stuck in since the start of the year. Last week they fell by 21,000 to 454,000, essentiality reversing the big rise last week.

Because the week-to-week movements in this data can be very volatile and noisy, it makes more sense to concentrate on the four-week moving average. It fell 1,250 to 466,000. While that is well below the 598,000 where it was a year ago, it is still a very elevated level. To really indicate that the economy is gaining enough jobs to put a real dent in the unemployment rate, we need to see the four week average fall to about 400,000.

The steep fall in the four-week average late last year and then subsequent leveling off so far this year is shown in the chart below (from http://www.calculatedriskblog.com/). This pattern of a sharp initial drop, and then a high plateau of claims is similar to what happened after the 1990 and 2001 recessions, periods that were referred to at the time as jobless recoveries. Recessions prior to that tended to see unemployment claims continue to fall continuously once the decline started.

While it is nice to see initial claims fall by 21,000, given the recent history, don’t read to much into it. The market clearly overreacted last week to the bad initial claims data, and it would be a mistake to overreact to the upside based on one week’s worth of data.

On the surface, the continuing claims data was a positive. Regular continuing claims, which are paid by state unemployment insurance funds and generally last for 26 weeks, fell by 224,000 to 4,413 million. They are down 2.154 million or 32.8% over the last year. However, almost half of all the unemployed have been out of work now for more than the 26 weeks of benefits provided by the state funds.

In June, the median duration of unemployment was 25.5 weeks, and the average was 35.2 weeks. Those are levels that the country has not seen since the Great Depression (well actually, we don’t have the data for the Depression). The post-war record for the median prior to the Great Recession was 12.3 weeks, and for the average was 21.3 weeks, both set in 1983. Clearly a measure that ignores half the people it is supposed to be measuring is deeply flawed.

After the 26 weeks is up, people move on to extended benefits, which the Federal government has provided in every recession since WWII. Extended claims fell by 344,000 in the last week to 4.577 million (combining the two largest programs). That is up from 3.289 million a year ago. Thus the total number of people getting help fell by 568,000 in the last week and is now for the first time below the year-ago level of 9.856 million.

Good news, right? Not by a long shot. It would be good news if there were any evidence that the people falling off the unemployment benefit rolls were actually finding work. There is none. What we are seeing is the effects of the inability to break the filibuster and to extend the unemployment benefits. The filibuster is supported by every GOP Senator outside of Maine, plus Ben Nelson (D-NE) of the “Cornhusker Kickback” fame. Nebraska happens to have one of the lowest unemployment rates in the country.

This cutting off of benefits is not just a humanitarian disaster, it is extremely poor economics as well. The economy is suffering from not having enough demand. We have all sorts of idle resources, both human and physical. There is simply not enough money flowing through the system to make use of those resources.

People who have been out of work for more than six months have probably already depleted their savings and run up their credit card balances. Now they will be left with no financial resources at all. No money = no demand. Extended benefits puts money into the hands of those who will spend it quickly. While there is some variation by state, the general rule is that unemployment will provide 60% of pre unemployment income up to a cap of about $400 a week.

In other words, the top benefit works out to be about $20,800 a year. Even in low-cost areas of the country, it is hard to raise a family on that sort of income. With five people looking for work for each job opening, it is not likely that the main reason for the high level of unemployment is that people are simply content to sit around all day doing nothing and live large on their princely $400 a week.

By this point, they have probably already cut back. They will have pulled little Jane out of karate and little Jimmy from his piano lessons. That means less income for the karate and piano teachers. Now with benefits cut off its is not just those extras that get cut, it is the electric bill and the gas bill.

Since one out of four houses are now underwater, it is very difficult for many of these people to tap the equity in their houses (there is none) which in previous downturns might have seen them through a rough patch. The rational response is simply to stop paying the mortgage, and live rent and mortgage free until the sheriff shows up at the door. That, however, eventually means still more foreclosures, and when the bank sells the home, lower housing prices. It is also not going to be good for any of the companies in the mortgage complex, ranging from Wells Fargo (WFC) to Fannie Mae (FNM, aka the taxpayers) to MGIC (MTG).

With no income, they will not be able to go to Wal-Mart (WMT) or Big Lots (BIG) to get even essential supplies and food. They will have to turn to the local food banks, which are already very stressed in many areas of the country. The reduced demand from these people will lead to even more unemployment. That is why the non-partisan CBO scores extended benefits as one of the most effective stimulus programs on a dollar spent per job created/saved basis.

Never before (at least post-WWII) has the country cut of benefits when unemployment was anything close to being as high as it is now. Cutting benefits is likely to further slow the economy and result in reduced tax collections, so it is not even likely to succeed as a deficit cutting measure. It is simply mean and spiteful and will result in a lot of long-term damage to people and to the country. It is Hoover economics, plain and simple.

 

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 Zacks Strategic Investor service.

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