Initial claims for unemployment insurance rose sharply for the second straight week, rising 24,000 to 484,000. Just two weeks ago they were at 442,000. The four-week moving average, which is generally considered a better measure given the week-to-week volatility in the numbers, also rose — up 7,500 to 457,750.
To be sure, we are still in a much better situation on initial jobless claims than we were a year ago, when the four-week moving average was at 636,250, but the steady decline we saw starting from around a year ago that continued through the end of 2009 has turned very erratic so far in 2010.
As the graph below (from http://www.calculatedriskblog.com/) shows, the pattern of initial jobless claims is beginning to look much more like the pattern following the last two recessions, where there was a long period where initial jobless claims remained on a high plateau following an initial decline. This would be very bad news since those high plateaus represented very long stretches of “jobless recovery.”
It is possible that some of the increase over the last two weeks has been due to Easter, but if that is the case then we should see a very large decline in jobless claims next week.
Historically, we have needed initial jobless claims to be below 400,000 to indicate that the economy is on-balance adding jobs. Given the growth in the labor force and population, that figure might be a little bit higher now, but we probably need to see it fall below 425,000.
Even if it does, given that we lost 8.4 million jobs in this downturn, it will not be sufficient to just be creating jobs — we need to be creating a lot of jobs. Even if we could create 250,000 jobs per month, which is more than we averaged under President Clinton, simple math tells us that it would take 33.6 months — almost three years — to get back to the total number of jobs the economy had before the recession started.
That does not count the need to create jobs for the people entering the labor force each month. We need to create about 100,000 more jobs per month for them. In that context, having initial claims 65,000 or more above the job creation level is not very encouraging.
Continuing Claims
The news was not much better on the continuing jobless claims front. Regular state-paid jobless claims, which run out after 26 weeks, rose by 73,000 to 4.639 million. While those jobless claims are well off the 5.992 million level of a year ago, they don’t even come close to telling the full story.
In March, 44% of all the unemployed had been out of work for more than 26 weeks, and the average amount of time someone who is out of work has been looking for a job was 31.2 weeks (both records by very wide margins relative to any past recession).
After the state-based unemployment insurance runs out, people move over to federally paid extended benefits. Those rose by 162,000 over the last week and now stand at 5.570 million, almost triple the year ago level of 2.181 million. The key number is not the regular claims, or even the extended claims, it is the total of all the people getting uemployment benefits, which now stands at 10.609 million, up from 8.173 million a year ago.
Humanitarian Factors
The extended jobless claims are extremely important from a humanitarian point of view. They are also a very effective means of economic stimulus. Generally, state unemployment benefits only pay 60% of pre-unemployment income, and that is generally capped at about $400 per week (it varies by state). A 40% or more drop in income will cause people to deplete their savings very quickly, especially given the extremely low savings rate in the country in the years leading up to the recession.
People will also quickly start to max out their credit cards. People tend to have a lot of expenses, which while not absolutely necessary, are hard to stop right away.
For example, the car that was bought two years ago might now seem like a bit more extravagant than it absolutely has to be — an old junker would still get you from point A to point B — but you still have three years of payments left on it. When you bought it you were working and it did not seem all that outrageous. At $400 a week, the car payment starts to take a big bite out of your total income and you have to fall back on your scant savings.
While we don’t want to see extended unemployment benefits become welfare in disguise, with all the dependency issues that welfare causes, the jobs are simply not there for millions that want to work. Cutting people off and telling them to get a job is simply not realistic.
If extended benefits were not available, people would be left absolutely destitute. In prior downturns, people might have been able to survive by tapping into the equity in their homes, but with almost 1 in 4 homes with mortgages now underwater — and millions more with less than 10% equity — that is not an option for many.
Incidentally, the areas with the highest unemployment tend to also be the areas with the largest percentage of houses that are underwater. For most of those people, the most sensible option is to simply stop paying the mortgage. Obviously, such a course is not good news for the banks with big mortgage operations like Bank of America (BAC) or the mortgage insurance firms like MGIC (MTG). It would lead to even bigger losses for Fannie Mae (FNM). Since we the taxpayers own 80% of it and her brother Freddie Mac (FRE), that means more losses for the taxpayers.
Beyond that, it means that more homes eventually end up in foreclosure. As those homes go on the market they further depress home prices, dunking more of their neighbors under water. Since for the vast majority of Americans, housing equity is their biggest store of wealth (or at least it used to be), the negative wealth effect will slow consumer spending even for those that still have jobs.
Of course, in the absence of extended benefits, the long-term unemployed would not be able to spend at all. They would have to rely on food banks and soup kitchens to eat, rather than going to Kroger’s (KR).
Current efforts to end extended benefits are not just cruel, but they are extremely bad economics, even if couched in sanctimonious terms about them not being paid for. Ending them would tend to slow the economy more, and that would result in lower tax revenues.
Yes, the long-term structural deficits need to be addressed, but with the unemployment rate at 9.7% this is not the time to be either raising taxes or cutting spending. If spending has to be cut, there are many places to do so that would do far less damage to the economy.
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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