More Unemployment, Longer

One of the most important aspects of this recession is the length of time people are out of work once they get their pink slips. The average length of time someone who is out of a job has been looking is now up to 24.5 weeks -- a dramatic increase from the 22.5 weeks last month and 17.6 weeks a year ago.

This simply blows away the previous record (other than last month) of 21.2 weeks, which was touched in July of 1983. Of course, there is a skewed distribution of unemployed duration since there is no limit on the upside, but you can’t be unemployed for less than 0 weeks. The median length of unemployment has also been rising, though, now up to 17.9 weeks from 14.9 weeks in May and 10.1 weeks a year ago. It is also at a record with the worst levels prior to this recession, being just 12.3 weeks hit in May of 1983.

While the absolute number of people who are out of work is a record of 14.7 million, to some extent that should be expected, given the growth of the workforce since the last really bad downturn in the 1980’s. The previous peak was 12.0 million at the tail end of that recession. However while the current level of overall unemployed is 22.5% above its previous peak, the number of long-term unemployed is truly at unprecedented levels.

The number of people out of work for 27 weeks or longer is now 4.281 million, 51.8% higher than the previous peak of 2.885 million (6/83). It is also 11.0% higher than it was just a month ago, and 170% higher than it was just a year ago. The ratio of long-term (27 weeks or longer) unemployed to short-term unemployed (less than 5 weeks) is now at 1.37. Prior to April, the ratio had never exceeded 1.0.

The history of this ratio is shown below. While the graph does not include recession bars, I would note that in the past this ratio tended to peak after the recession formally ended, thus it seems likely that it will continue to increase for a while longer.



Being out of work for more than six months is a very different experience than being out of work for two or three weeks. In many states, it means that your unemployment benefits have run out (although the stimulus bill has extended benefits for most). The extended benefits from the stimulus bill have been a vital lifeline to millions of people.

Long-term unemployment will do serious permanent damage to a person’s financial situation. To have this happening in conjunction with weak asset prices can be devastating. In prior recessions, people had the ability to tap the equity in their homes as a potential liquidity lifeline.

Now with so many homeowners underwater, that option is no longer available. At one point they might have been able to have drawn on their savings, however for years we as a country went with a savings rate that was close to zero, as people used asset appreciation as a substitute. Now that the asset appreciation has turned to asset depreciation, there is not much there to fall back on.

For awhile, they will fall back on plastic, but eventually the cards max out. At that point, the only real option becomes bankruptcy. The big credit-card-issuing banks like American Express (AXP - Analyst Report), J.P. Morgan (JPM - Analyst Report) and Capital One (COF - Analyst Report) realize this, which is why they are aggressively lowering the limits on many card holders. From their perspective, it is better to get stiffed on $5,000 than on $15,000.

If someone is faced with the double problem of being underwater on their house and being out of work for an extended time, then walking away from the house, or simply not paying the mortgage until the sheriff knocks on the door, becomes an increasingly attractive option. The result is more distressed homes on the market, and more pressure on housing prices, which in turn puts more homeowners underwater.

This is not an attractive prospect for any company exposed to the mortgage area, including the big banks and Fannie Mae (FNM - Snapshot Report) and Freddie Mac (FRE - Analyst Report). That means bad news to the taxpayers as well, since we are the proud owners of majority stakes in them.