Initial claims for unemployment dropped by a much bigger than expected 52,000 in the last week to 565,000, the lowest level so far this year. This brought the four-week average down by 10,000 to 606,000.
Without a doubt this is good news, but before we break out the bubbly, remember that this was a holiday-shortened week. I would wait at least another week to see if this looks real.
Still, the four-week average is now a full quarter past its peak and 52,750 below it.Historically, peaks in the four week average have been associated with the official ends of recessions.
As the graph below shows (from http://www.calculatedriskblog.com/) we are both far enough past and far enough below the apparent peak that it looks unlikely that it is a false peak. Historically, false peaks have been rare (there were two small potential ones in the early 1980’s cycle, but much smaller and shorter than the current decline) so I think that it is unlikely at this point that we go on to make fresh highs. Now the big question will be: does the correlation between the peak in the series and the end of recessions continue to hold?
It also seems likely to me that the path on initial claims going forward will more closely resemble that of the last two recessions than earlier ones, remaining elevated but below the technical peak for a very extended time and falling only gradually, rather than a precipitous drop.
The news on continuing claims was not as good. Continuing claims rose to 6.883 million, an increase of 159,000 and a new record. Some confirmation in the continuing claims data would make me more confident in the initial claims “green shoot.” So far we are not seeing it, and any recent declines in continuing claims have either been revised away or simply reversed and the old peak exceeded.
In absolute terms, the level of continuing claims just blows away any previous peak, like the mid 1970’s and the early 1980’s. The population and the workforce have both grown since then, so as a percentage of the covered workforce, we are actually slightly below the early 1980’s level (5.1% vs. 5.4%) and well below the mid-1970’s level (7.0%).
On the other hand, continuing claims are still rising, so it is possible that we will take out the early 1980’s peak, but it seems unlikely that we will get above the 7.0% level to set a new record.
So what does falling new claims and rising continuing claims say? To me it says that the duration on unemployment is going to continue to increase. Last month, the median time the unemployed were out of work increased by three full weeks in a single month. The pace of layoffs has slowed, but the pace of new hiring is still very low.
Half of all the people out of work have been looking for a new job for more than 17.9 weeks. Over 30% have exhausted their regular unemployment benefit (out of work more than 26 weeks) and are either on the extended benefits or are totally without income.
Unless they have investments (i.e. borrow against or drain the 401-K) or equity in their houses, they will have to fall back on credit cards to survive. When those get maxed out, well American Express (AXP), Capital One (COF) or J.P. Morgan (JPM) will just be out of luck since the people will default or file for bankruptcy.
As for the long term unemployed, their financial position is likely to be permanently damaged. Their retirements are likely to be significantly different than they had envisioned, and their kids’ college plans may have to be altered. The effects of the Great Recession will echo for years to come.
Read the full analyst report on “AXP”
Read the full analyst report on “COF”
Read the full analyst report on “JPM”
Zacks Investment Research
