In the last week, initial claims for unemployment insurance rose by 17,000 to 551,000. This reverses the previous week’s gains.
The four-week moving average fell by 6,250 to 548,000. The four-week average is now more than 100,000 below its April peak, and seems unlikely to surpass it in this cycle.
Historically, a peaking in initial claims has been a good indication that a recession is over. This time around, the peak in initial claims came well before other end-of-recession indicators began to emerge. In recent weeks however, progress on claims has stalled out and become erratic from week to week.
We have seen this movie before, following both of the two most recent recessions. These long periods of jobless recovery can be clearly seen in the graph below (from http://www.calculatedriskblog.com/). Claims would come off the peak then hover at high levels for a couple of years.
We may have found our hover spot between 500,000 and 550,000 claims. That is simply not going to be good enough — we need to get initial claims back down to the 400,000 area to indicate that the economy is, on balance, adding jobs. We will need to get it substantially below that if we hope to make up for the 7 million jobs that have already been lost in this recession.
We did get some apparent good news on the continuing claims side, which fell 70,000 to 6.090 million. However, that number only tracks people getting regular state benefits, which run out after 26 weeks. After that they move over to federally subsidized extended benefits, under two different programs.
Combined, those two programs are helping 3.718 million, an increase of 104,500 from the prior week (there are actually timing differences with the regular continuing claims data one week behind the initial claims data, and the extended claims an additional week behind). Thus, if we ignore the timing differences, the total number of people receiving unemployment benefits rose by over 34,000 in the last week.
Large numbers of people, up to 1.5 million, are scheduled to run out of even their extended benefits by the end of the year. The House has passed a 13-week extension for people living in high unemployment states (sorry, North Dakota), but it has yet to pass the Senate.
What will happen to the people who exhaust even their extended benefits? They have probably already maxed out their credit cards, or will after a few weeks of no income at all. Then they will just stop paying and go into bankruptcy, leaving a big headache for the card companies like Capital One (COF) and American Express (AXP).
They will stop paying their mortgage, especially if they are underwater in their homes, much to the dismay of Fannie Mae (FNM) and Freddie Mac (FRE) and ultimately to you, the taxpayer and thus owner of 80% of those “fine institutions.”
Those people, if they were once middle class they will no longer be, and their chances of climbing back up into it are slim. It’s not like others are climbing into the middle class; rather we are losing it, and developing an economic structure that looks more and more like, say, Brazil, with a relatively small number of people of extraordinary wealth, and masses of people just holding on by their fingernails. This process has been under way for a long time, but is being accelerated by the current downturn.
Read the full analyst report on “COF”
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Read the full analyst report on “FNM”
Read the full analyst report on “FRE”
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