Chalk up another step forward in the economic-data dance of “two steps forward, one step back” with the release of the initial claims for unemployment insurance. This week, claims fell to 550,000, a drop of 38,000. This brought the four-week moving average down to 555,250, a drop of 4,750 on the week and bringing the average to more than 100,000 below its peak 17 weeks ago.
As shown on the graph below (from http://www.calculatedriskblog.com/) the four-week average tends to peak at or just before the official end of recessions. Given both the magnitude and duration of the decline it seems pretty clear that we are past the peak for this cycle.
If history is any guide, it means the recession is either already over or very soon will be.
The improvement was very widespread geographically, with 19 states reporting a drop of 1,000 or more in new claims and none reporting an increase of that magnitude.
In other words, when the NBER finally gets around to putting an end date on the recession (probably in the first quarter of 2010), they will put the end date around now. Keep in mind what the end of a recession means — it is just that the economy has stopped falling, and is by definition at its lowest point. If you fall off a cliff, the point of maximum pain is when you hit the ground, not while you are still falling.
A key measure that could confirm an end of the recession comes out next week in the form of the Industrial Production and Capacity Utilization report. If Capacity Utilization, particularly for manufacturing, rises from its record low level in June (68.0% total, 64.6% for manufacturing), it is a pretty safe bet that the recession is over.
The level of pain we are in economically is visible in the continuing claims numbers, which rose by 69,000 to 6,310,000. That only counts people in the regular state unemployment programs — many people have already timed out of them — and are the supplemental benefits which were part of the stimulus bill.
There are an additional 2.75 million people on the main extended benefit program, an increase of 97,500 from the previous week. However, the data on regular continuing claims is one week behind the data on initial claims, and the data on extended benefits is one week behind that. The other smaller extended benefit program saw an even bigger jump of 139,000 to 492,000 — a stunning 39.5% increase in a single week.
If the extended benefits were not there, that would mean millions of people in far greater economic distress. Perhaps the single most under-reported aspect of this recession is the extraordinarily long time people are staying unemployed once they get their pink slips.
We will see tomorrow if the median duration of unemployment has continued to rise beyond its June record of 17.9 weeks, up from 10.3 weeks at the beginning of the year. The long-term unemployed (out of work for 27 weeks or more) number far exceeded that of short-term unemployed (4 weeks or less) in June (ratio of 1.38:1). Prior to April, the number of long-term unemployed had NEVER exceeded the number of short term unemployed.
Given the historical pattern of unemployment duration during and after recessions, it is very likely that the unemployment duration continued to increase in July. The consensus expectations are that the economy lost 328,000 jobs in July — a big improvement over the 467,000 lost in June and less than half the peak jobs loss rate of 741,000 in January. On the other hand, it would represent the 19th straight month of job losses — a post-WWII record (see second graph).
We are far from out of the woods, but fewer people losing their jobs would be perhaps the best tonic possible for the overall economy. It would help retail sales across the spectrum from upscale stores like Nordstrom’s (JWN) down to low-end retailers like Family Dollar (FDO). It is not just those people who are out of work that have been spending less, but those that fear that they could soon join the unemployment lines.
While a lower rate of job losses would not induce those already out of work to open up their wallets, it could increase the confidence of those who are still working — who then might go shopping for items they have been putting off buying.
The real kick to the economy will not come for a few more months, when we actually start to regain some of the lost jobs. Look for that to happen sometime in the first quarter of 2010.
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