Initial Jobless Claims Go Up

By Dirk van Dijk

Initial Claims for Unemployment Insurance, or "initial jobless claims," rose by 25,000 last week to 471,000, well by 27,000 if you count the fact that last week’s claims were revised up by 2,000. That caused the four-week moving average, which is considered to be a better measure given the week-to-week volatility in the numbers, to rise by 3,000 to 450,500.

As the graph below shows, initial jobless claims fell sharply in the last three quarters of 2009 after reaching near record levels. However, since the start of 2010, the trend in initial jobless claims has been very erratic, and we seem to be stalled at around the current 450,000 on the four-week average.

This pattern is beginning to resemble what happened in the last two recessions -- a big initial drop and then a stall at a high plateau. The pattern in recessions prior to the 1991 downturn was very different, with a sharp peak and quick decline. Until New Years Eve, it looked like we were following the earlier pattern…now, not so much.

While we are well below the peak and have made significant progress from a year ago when the four-week moving average was at 619,250, it really is not good enough. To actually be making progress on reducing the number of unemployed people in this country, we need to see this figure drop below the 400,000 level. For awhile we were making progress, but more and more it looks like we have stalled.

[click to enlarge]

Continuing Jobless Claims

The news on the continuing claims front was more encouraging. Regular continuing claims fell by 40,000 to 4.625 million. Like initial jobless claims, they are well off the highs and we have made significant progress since a year ago, when regular continuing claims were at 6.449 million. That is a drop of 1.824 million, or 28.3%.

That improvement is deceptive, though, since regular continuing claims don’t even come close to telling the full story. Regular continuing claims are paid out of the State Unemployment Insurance funds, and expire after 26 weeks. In April, 6.716 million people had been out of work for more than 26 weeks -- 45.9% of all the unemployed, an all-time record share by a fairly large margin.

In fact, the ratio of the number of long-term unemployed (over 26 weeks) to short-term unemployed (less than five weeks) rose over 2.50 in April. Prior to this downturn, the highest that ratio had ever been before was 0.72, during the darkest parts of the 1982-83 recession. Clearly a measure that does not capture almost half of what it is trying to measure is deeply flawed.

After 26 weeks, people move on the extended claims, which are paid by the Federal Government and which is a major part of the Stimulus spending. Even those payments don’t last forever, but in some hard-hit areas, people are eligible for benefits totaling 99 weeks (including the original 26 weeks).

Recently, extended claims have been trending down, and they fell by 73,000 this week. However, they are now much larger than regular continuing claims at 5.342 million, and that is more than twice the 2.442 million level of a year ago.

A better way to look at continuing claims is at the total number of people getting benefits, both regular and extended. This week we fell below the 10 million mark to 9,967 million, but that is up 12.0% from 8.898 million a year ago.

Extended Benefits Still Necessary

Unemployment insurance, both regular and continuing, has an obvious humanitarian benefit, and the humanitarian benefit is much more important for the extended jobless claims than the regular jobless claims. After all if you are out of work for a few weeks, it's not that big a deal -- more like an unscheduled vacation. You still have financial resources to draw on. You might cut back on your spending a bit, but there are lots of things that you are locked into and would incur substantial costs to cut out.

With regular unemployment benefits generally (varies by state) paying about 60% of the income you got while employed, usually up to a cap of about $400 a week, one can stay afloat for awhile from that income and by drawing down on savings or using credit cards. However, as weeks turn into months, the picture changes a great deal.

Those savings are not infinite -- and given the absurdly low rate of personal savings in the economy in the years before the panic of '08 were probably on the meager side to begin with -- particularly outside of tax-sheltered retirement plans. Tapping those accounts means you get taxed on the money you take out at ordinary income rates, plus you get hit with a 10% penalty.

In years gone by, the unemployed who were homeowners could tap the equity in their homes, but with 24% of all homes now worth less than the mortgages that are already on them, and with an additional 4% with less than 5% positive equity, that option is not open to them this time around. Also, the states with the highest percentages of underwater homes also tend to be states with higher-than-average unemployment rates.

If there were no extended benefits, these people would not only be left with no income, but probably no financial resources at all. Obviously that would be bad news for them, but it would also be bad news for the entire economy.

They will first respond by stopping payment on their mortgages and wait for the sheriff to show up at the door. These days, in many parts of the country, it is possible to live rent- and mortgage-payment-free for up to a year until the sheriff shows up. However, that just leads to more foreclosures, and deep losses for Fannie Mae (FNM) and Freddie Mac (FRE), both of which are now wards of the state.

It also hits the capital of the big banks like Bank of America (BAC). While the big banks are rightfully not popular these days, the economy would not be better off if Bank of America became Bankrupt of America.

With no income and no other financial resources to draw on, people could not shop for even the most basic items, which would be bad news for retailers like Wal-Mart (WMT). Earlier on they have probably already traded down from shopping at more upscale stores like Macy’s (M).

In response to the lower sales, stores like Wal-Mart would respond by laying off more people, adding to the unemployment rolls, and those people would eventually be in the situation where they too had no income or other financial resources -- and the downward spiral would continue. It is for this reason that the non-partisan Congressional Budget Office scores extended benefits as among the most effective stimulus programs on a dollar-spent-per-job-saved-or-created basis.

If the recent declines in the total number of people getting benefits is because they found jobs, then it is very good news for the economy. If it is because even the extended benefits have now run out... not such good news.