The Initial Claims for Unemployment Insurance report was decidedly weak, with claims rising to 496,000, an increase of 22,000. The 4-week moving average rose by 6,000 to 473,750.
The weekly numbers can be very volatile, so in general it is better to watch the 4-week average to get a better sense of the trend. As the chart below (from http://www.calculatedriskblog.com/) shows, the 4-week average had been in a very steep downtrend since it peaked in mid-April, but has reversed course over the last month or so (you might have to look closely to see it).
There is a huge question of if we will see the sort of straight-down pattern that was typical following recessions prior to 1990, or if we will settle at the high plateau that happened following the last two downturns. We probably have to get the 4-week average down below the 425,000 level, and preferably down near 400,000, to have the data consistent with the economy on balance adding jobs rather than losing them.
We are now moving very much in the wrong direction. It does not look like we will get to a net adding of jobs anytime soon, especially with this week’s number above the 4-week average, meaning that the 4-week average is probably more likely to rise than fall next week.
Continuing Claims
The news on the Continuing Claims front was not much better, with regular state paid claims rising by 6,000 to 4.617 million. While that figure is below where we stood a year ago (5.065 million), it does not come close to telling the whole story.
Regular claims run out after 26 weeks. After that, claims are paid for by the Federal government, largely through funds from the ARRA, a.k.a. the Stimulus Act (and prior to its passage, the first round of stimulus enacted in the spring of 2008).
In January, over 40% of all the unemployed had been looking for work for more than 26 weeks. The extended duration of unemployment in this downturn is not just a record. It is a chart-smashing, rewrite-the-record-book, previously-considered-unimaginable type record. Extended claims are now at 5,884 million, or 23.1% higher than regular claims.
The good news is that extended claims dropped by 320,000 in the last week, more than reversing the 275,000 rise in the prior week. In the absence of the extended claims, there would be almost 6 million people (and their families) who would be without any income at all. By the time they have been unemployed for 6 months, they have probably already depleted most of their savings, especially considering how low the savings rates were prior to the recession.
They have probably also run up their credit card balances. So just what would happen if those people had no income at all? For starters, those credit card bills would not get paid, and that would hardly be good news for banks like Capital One (COF) that hold the credit card receivables.
The Bigger Picture
In times gone by, if they were homeowners, they could probably tap into the equity in their house to tide them over, but that option is not open if you are already underwater on your mortgage, or even just close to “sea level.” As we reported here (“A Deluge of Homeowners Underwater”), almost one in four homes with a mortgage is now underwater. So they would probably stop paying their mortgage and wait for the sheriff to show up at the door. When the sheriff does show up, that would be one more foreclosure on the market, putting further downward pressure on housing prices.
In the meantime, it is reduced cash flow for the holders of the mortgages, and the related mortgage-backed securities — not exactly what a Fannie Mae (FNM) needs right now. Of course, with no income, and no liquid assets, new spending is out of the question. That would mean 6 million fewer customers for retailers of all stripes.
During the first 6 months of reduced income, they probably stopped going out to eat at places like O’Charley’s (CHUX) and now buy their food at Wal-Mart (WMT) and cook at home. With no income at all, they would have to rely on overstretched food banks. As a result, the many of the waiters at O’Charley’s get laid off, and the remaining ones are not making a lot in tips. Thus they too have to cut back on their spending.
The extended benefit program keeps the money circulating, and in the process prevents further layoffs from occurring. In addition to the obvious humanitarian benefit, it is also highly effective as economic stimulus.
However, it is far from an optimal solution, and we do not want to see extended benefits simply become welfare under another name, along with all the dependency issues that welfare can foster. However, even the extended benefits do not last forever, and by June an estimated 5 million people will have exhausted their benefits unless the extended claims are extended once again. (See here).
It is not clear how much of the drop in extended claims is due to people reaching the end of this life line, and how much is from them finding new jobs. Some of those dire consequences that we have avoided so far might still be on the horizon.
This is the second major negative report in two days. The market ignored yesterday’s dismal New Home Sales report, which will probably lead to many more jobs lost in the Construction industry, which has already been amongst the hardest hit in this downturn. With the Architectural billings index still in negative territory, it is unlikely that those workers will find jobs in non-residential construction anytime this year. The recovery seems to be rapidly losing the momentum it had in the fourth quarter.
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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