Initial Claims for Unemployment Insurance rose by 12,000 to a seasonally adjusted 472,000. If one factors in the upward revision to last week’s numbers, the increase is 16,000. The four-week moving average, which smooths out some of the week-to-week volatility in the weekly numbers, was virtually unchanged, falling by 500 to 463,500.

As the graph below (from http://www.calculatedriskblog.com/) shows, initial claims skyrocketed early in the recession, peaked in April of 2009 and then declined sharply through the end of 2009. Since then, the four-week moving average has been stuck in a tight range. This is a pattern that is similar to what happened after the 1990 and 2001 downturns, but is strikingly different from the pattern in earlier recessions, where once claims started to fall they continued to do so until they were around the level they were at before the recession started.

The periods following the 1991 and 2001 recessions were referred to as “jobless recoveries,” and more and more it is looking like we are in one again. For the economy to be generating enough jobs to put a serious dent in unemployment, we probably need to see the four-week moving average fall below the 400,000 level and stay there.

Continuing Claims

The news was not good on the continuing claims front, either. Regular state paid continuing unemployment claims rose by 88,000 to 4.571 million. In general, state-based claims have been declining over the last year, and this increase breaks that pattern. A year ago, state-based continuing claims stood at 6.491 million, and last week’s level of 4.483 million was the lowest since December 2008. This week’s increase brings it to its highest level since February.

State claims run out after 26 weeks and after that people move on to extended benefits that are paid by the federal government as part of the stimulus program. With 6.763 million people having been out of work for more than 26 weeks, or 46.0% of all the unemployed, the regular claims numbers do not tell the full story — not by a long shot.

Extended claims do not last forever. As it currently stands, people can have benefits totaling 99 weeks. Given the still very poor state of the job market, even those benefits are starting to run out. A bill to extend them is currently stalled in the Senate, and hundreds of thousands could lose this last financial lifeline by the end of the month.

Thus the fact that extended claims fell by 169,000 to 5.221 million has to be seen as a mixed blessing at best. If that decline is due to these people actually finding a new job, that is very good news. If, as is more likely, the case, it is mostly due to benefits simply running out, it is very hard to cheer.

Still, tracking the total number of people getting benefits makes more sense than just looking at the number of people getting state-based benefits. There are a total of 9.792 million people getting unemployment benefits, a decline of 81,000 from last week, and up 559,000 or 6.05% from a year ago.

The Damage of Long-Term Unemployment

The humanitarian hardship that the people who are losing even the extended benefits are facing is obvious. If you have been out of work for nearly two years, it is highly likely that you have already depleted your savings, probably even including your 401-K and IRA accounts (and paid taxes and penalties as a result). You have probably already run up your credit card debt. The extended benefit is your last source of income, and you have no other financial resources to fall back on.

In years gone by, if you were a homeowner you could have probably borrowed against the equity in your home. However with one in four houses (with mortgages) in the country already having mortgages that are greater than the value of the house, that is much less likely an option. A more common option is simply to stop paying on the mortgage and wait to be thrown out.  Given the huge number of people doing this, the court system is absolutely clogged, and in many areas it is possible to live rent- and mortgage-free for well over a year (different states have different foreclosure laws, so the period can vary greatly).

While that option can help people survive and stretch the last remaining income they have, it is very bad news for the overall economy. For starters, it means that the mortgage is not worth very much, and that is a hit to the owner of the mortgage. More and more, that owner is Fannie Mae (FNM) or Freddie Mac (FRE), and since the government owns 80% of both of them, that means a hit for the taxpayers.

In other cases, the mortgages are owned (usually after they have been sliced and diced and turned into various forms of mortgage backed paper) by the big banks like Bank of America (BAC). The loss they take is a hit to their capital and thus their ability to lend.

It also means that the house is part of the “shadow inventory” of houses. Eventually the house will be foreclosed on, and then put onto the market, further depressing home prices in that neighborhood, and pushing the value of the neighbors homes below the level of their mortgages.

Having no income also means an inability to shop. Even with no income, people still have to eat, but now they have to be on food stamps or rely on the local food banks, rather than going to Kroger’s (KR) or even Wal-Mart (WMT). Having millions of people with no income at all would severely crimp retail sales, and that would lead to more unemployment. Those people would first go to the state based claims, but eventually on to extended claims.

Extended Claims Stalled, but Still Necessary

Because extended claims put cash in the hands of the people who are most likely to spend it, and most likely to spend it on necessities, the non-partisan CBO scores extended unemployment benefits as one of the most effective stimulus provisions on a dollar-spent-per-job-created or saved. The extension is stalled in the Senate due to a provision that would make some of the wealthiest people in the country — hedge fund managers — actually pay taxes as if they were wealthy.

As it stands now, they pay only 15% on the vast majority of their income, which is a lower rate than what many of the unemployed will be paying on their unemployment benefits (if they still have them). Then again, the hedge fund managers can probably afford to contribute a lot more to those senators re-election campaigns than can the unemployed who are about to lose their last source of income.

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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