Continuing Claims Keep Climbing

Evidence is starting to accumulate that the economy is no longer falling, but that it has not started to turn up again, just stabilizing at a lower level. The latest evidence is that new claims for unemployment insurance dropped 13,000 last week to 623,000. This is 32,000 below the peak seven weeks ago.

New claims have historically peaked near the end of recessions, and a 32,000 drop and seven weeks since it was hit is probably enough to say that new claims have peaked for this cycle. Still, the level is extremely high -- on par with the worst of what was seen in the 1982-83 recession.

As the graph (from http://www.calculatedriskblog.com/) shows, in the last two recessions, new claims remained high well past the peak -- in distinct contrast to the behavior in earlier downturns, when once they started to fall they did so very rapidly. It seems very likely that we will get the extended high plateau again this time around.



While the four-week average of new claims has dropped slightly, continuing claims continue to soar to ever-new heights. This week they hit 6.788 million, up 110,000 in just a week. This is the 17th straight weekly record. Of course, the size of the labor force has also grown since the last really bad recessions, so we are not quite at record levels as a percent of covered employment. We are now at 5.1% of the covered workforce. At the worst point of the early 1980's downturn we hit 5.4%, and in the mid 1970's recession we got up to 7.0%, so we are a long way from that level.

However, if we continue to rise at 100,000 plus per week, it will not be long before we take out the 1982 level. The past two recessions, continuing claims stayed at near peak levels for about two years after they stopped rising. A repeat of this pattern -- and perhaps even more extreme -- seems likely this time around. However, we do not yet know where that plateau will be.

Keep in mind that there are two ways that continuing claims can fall. The first way is if the person finds a new job. This is what we hope will happen. The second, less-happy reason is that the person has been unemployed too long to continue to collect them. After all, unemployment benefits were not meant to be a permanent retirement package.

When that happens, the person is left with no income at all, which means he has nothing to spend at the stores. The person and the family he or she supports has to go into absolute economic survival mode, and all discretionary purchases are eliminated.

I suspect there will be a fair amount of that happening in this cycle, and as a result I would be very cautious about investing in retailers and the Consumer Discretionary sector in general. Mid-range stores, like Macy's (M - Snapshot Report) and J.C. Penney's (JCP - Analyst Report) would seem to be most vulnerable.  Discounters like Wal-Mart (WMT - Snapshot Report) will benefit from those trading down from higher end stores.

The stabilizing of new claims, along with the constant and relentless rise in continuing claims suggests that while the pace of layoffs may be slowing, the pace of new hiring has not increased. This will not be a V shaped recovery. The big question is will it be a U, or will it be an L?