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Initial Claims for Unemployment Insurance rose by 22,000 last week to 414,000. This was worse than the expected level of 400,000. Last week’s numbers were revised upwards by 3,000, so one could see it as an increase of 5,000.
Recently, initial jobless claims seemed stuck once again in a trading range above the 400,000 level, after a brief period lower than that earlier this year. The drop three weeks ago below 400,000 level was very good news, after 17th straight weeks above it. Alas, that was not destined to last, and it got revised away.
Being below 400,000, as we were in February and March, signaled the start of much more robust job growth, such as we saw in March and April. We seem to be flattening out just over the 400,000 level, which is not great, but it is an improvement over the 425,000 or so level we were in for most of those 17 weeks.
The climb back above the 400,000 telegraphed job weakness in May and June. While the April (+217K) job growth was a heck of a lot better than what we saw in May (+53K after revisions) or June (+20K), it was not really enough to make a serious dent in the vast army of the unemployed, and we saw the unemployment rate rise in both months. July was a bit better, with 85,000 jobs added.
August was a disaster, with zero jobs gained, though it was affected by a strike at Verizon ([url=http://www.zacks.com/stock/quote/vz]VZ[/url]) that counted for a loss of about 45,000 jobs. Even adjusting the establishment numbers for that, it was still a weak report.
The unemployment rate, which comes from a separate survey, was unchanged at 9.1%, despite a tick up in the participation rate. The percentage of the population actually working increased according to the household survey, but from its lowest level since 1983. While the household survey is generally considered less reliable than the establishment survey, it is worth noting that it was much more upbeat, pointing to an increase of 331,000 jobs in August.
Track the 4-Week Moving Average
Since claims can be volatile from week to week, it is better to track the four-week moving average to get a better sense of the trend. It rose 3,750 to 414,750. As far as the domestic economy is concerned, robust job creation has been one of the last big parts of the puzzle to fall into place.
Now the big question is: can we get below the 400,000 level and stay there? There are a lot of pressures slowing the economy, with a more concretionary fiscal policy at all levels of government at the top of the list. The rise away from that level over the previous two weeks was disappointing, but not a cause for despair.
The economy is growing but very slowly, and while job growth in the first seven months of this year are almost double the job gains of the first half of 2010, it is not enough to put a dent in the huge army of the unemployed. The August employment report was worse than expected, and even weaker than the back-to-back disasters that were May and June.
We added a total of nothing, according to the establishment survey. The private sector total of 17,000 was offset by the loss of 17,000 jobs in the public sector (mostly State and Local government).
Even with the Verizon adjustment, 62,000 private sector jobs is not going to cut it. If the separate household survey number were what we were looking at, its gain of 331,000 would be much more like what we need on a sustained basis.
The unemployment rate was unchanged at 9.1%, and the employment rate, or the percentage of the population over age 16 actually working, rose to 58.2% from 58.1% in July. The improvement was welcome, but the July level was the lowest since 1983, and at that point the movement of women into the labor force was not yet complete. The consensus was looking for an increase of 111,000 private sector jobs, partially offset by the loss of 38,000 public sector, mostly local government jobs, for a net increase of 75,0000.
The first graph (from this source) shows the long term history of the four week average of initial claims.
The Significance of the 400K Level
So why is the 400,000 level so significant? The next graph shows why. Historically that has been the inflection point where the economy starts to add a lot of jobs. It layers over the monthly gain or loss in private sector jobs (red line, right hand scale) and total jobs (blue line). Unfortunately, the automatic scaling did not put a line at zero for the job growth line, so you will have to eyeball it a bit.
Notice the strong inverse correlation between job growth and initial claims, and how when the blue initial claims number is below the 400,000 level that job growth is strong. OK, it's not that an increase from 399,000 to 400,000 is all that much difference than from 397,000 to 398,000 or from 402,000 to 403,000, but big round numbers are psychologically important, especially when that round number is near a historical inflection point. Note that the four-week average is the same data as in the chart above, but it covers a much longer time frame.
The data on regular continuing claims was slightly encouraging this week. Regular continuing claims for unemployment insurance fell by 30,000 to 3.717 million. The overall trend is in the right direction. They are down by 802,000 or 17.7% from a year ago.
Regular claims are paid by the state governments, and run out after just 26 weeks (several states have lowered the number of weeks they are going to pay in the future recently, and are tightening up eligibility standards). The next graph shows the long-term history of continuing claims for unemployment, as well as the percentage of the covered workforce that is receiving regular state benefits. It does a good job of showing just how nasty that the Great Recession was for the job market.
It also shows how things at the regular state unemployment benefit level have been getting much better over the last year (but still well above the peaks of the last two recessions). Still, we are closing in on being down to half of peak levels.
Note that the insured unemployment rate generally follows the direction of the number of claims, but has been gradually diverging over time. That is a function of the overall growth of the labor force, and of tighter eligibility standards for getting unemployment insurance over time. It also reflects the fact that this time around a very large proportion of those getting unemployment benefits are getting them from the extended federal programs, not from the regular state programs.
In August, half of all the unemployed had been out of work for 21.8 weeks (down from a record high of 25.5 weeks in June 2010, but up from 21.2 weeks in July), and 42.9% had been out of work for more than 26 weeks. Just for a point of perspective, prior to the Great Recession, the highest the median duration of unemployment had ever reached was 12.3 weeks near the bottom of the '82-83 downturn. Clearly a measure of unemployment that by definition excludes 42.9% of the unemployed paints a very incomplete picture.
The number of short-term unemployed (less than 5 weeks) was actually on the low side. The problem in terms of employment is not a lot of firing, but a lack of hiring. This has been the case for some time now. After the 26 weeks are up, people move over to extended benefits, which are paid for by the Federal government.
While regular claims are down, it is in large part due to people aging out of the regular benefits and “graduating to extended benefits. Unfortunately, the data on extended claims in prior recessions is not available at the St. Louis Fed database. However, given the extraordinary duration of unemployment, it is a safe bet that they are higher than in previous downturns.
Extended Claims Down, but Flattening
The extended claims had also been trending down, but in recent months that decline has flattened out. They (the two largest programs combined) fell by 78,000 to 3.598 million this week. That puts them 1.869 million, or 35.2% below the year ago level of 5.467 million.
A much better measure is the total number of people getting benefits, regardless of which level of government pays for them. This is particularly true when looking at the longer term, not the week-to-week changes. Combined, regular claims and extended claims (including a few much smaller programs) fell by 167,000 to 7.169 million on the week and are down 2.540 million or 26.2% below last year.
(The extended claims numbers are not seasonally adjusted, while the initial and continuing claims are, so there is always little bit of apples-to-oranges. In addition, the continuing claims data are a week behind the initial claims, and extended claims are a week behind the extended claims data.)
Even with the deal that extended unemployment benefits for this year in exchange for continuing the top end of the Bush tax cuts, people will still “graduate from the system after 99 weeks, but people will continue to be able to move to the next tier up to the 99-week limit. Extended benefits are in four different tiers, so if benefits had not been extended, some people would have lost their benefits after 39 weeks of being out of work.
Unless there is a change (extremely unlikely give the recent budget deal), the extended benefits will end at the end of the year. Somehow I doubt that all of those 3.598 million people will have found jobs by then, as many employers are not even considering hiring people who have been out of work for more than six months, even if they have openings and the person is well qualified. What we are looking at is a massive increase in poverty coming at us next year.
What Washington DC Is (And Is Not) Doing
While the employment picture has improved from a year ago, in any absolute sense it is still just plain awful. I find it astounding that aside from making political points, nobody in Washington seems to care anymore. President Obama will be giving a major speech on the issue tonight, but I doubt there is much he can do if Congress does not agree, and Congress is not likely to agree.
The policies that Congress has been pushing are all things that would slow the economy, not speed it up. Fortunately, very few of the spending cuts in the first round of cuts in the deal will happen in 2011, and we get only a little bit in 2012.
The one exception is the Federal Reserve, which was doing its part by keeping rates low and by using quantitative easing. While that helps a little bit, it is also much less effective than fiscal stimulus would be. Right now monetary policy is sort of “pushing on a string.
In any case, QE2 is over with, and the likelihood of it being followed by QE3 is low right now, although the weak data and market of the last month or so have been raising the odds. Bernanke’s speech in Jackson Hole was a major disappointment and did not give us many clues as to what the Fed will do next. The recently released Fed minutes revealed that the Fed is deeply divided on what to do about the situation.
The “promise that the Fed made to keep the Fed Funds rate at the current 0-0.25% range until the middle of 2013 is causing the private sector to do a bit of quantitative easing on its own. One of the principal aims of QE is to lower mid- to long-term interest rates, and they sure have come down a lot of late.
One thing the Fed could do -- and Bernanke might endorse -- is ending the policy of paying banks 0.25% on their excess reserves. Ending that policy is long overdue, particularly when 0.25% is more than the rate on the two-year T-note. In effect, the Fed is paying Banks not to lend. That might be a useful thing to do if the Fed were trying to drain the money supply and slow down an overheated economy, but it seems counter to their basic objectives at this time.
The Fed seems very divided right now. Based on the Fed minutes and Bernanke’s Congressional testimony, it is not totally out of the question, and the recent data has to be pushing the Fed in the direction of doing something more.
However, there were three dissenters in the last policy statement, who objected to even the very mild step of making the “extended period language more explicit to mean until mid-2013. They want the Fed to have the flexibility to raise rates much sooner than that.
Personally, I think the dissenters are nuts. The recent attack by GOP presidential candidate Rick Perry on the Fed is entirely unwarranted. It was aimed at undermining the independence of the Central Bank, and that is outright dangerous. It is an attempt to take monetary policy as well as fiscal policy off the table, and thus prevent policy makers from doing anything about the extremely high level of unemployment.
Extended Benefits = Economic Stimulus
Extended unemployment benefits are, dollar of dollar, one of the most effective forms of economic stimulus there is. It is a pretty good bet that the people losing their extended benefits have depleted their savings and run up all the debt they can in trying to make ends meet. The maximum unemployment benefit works out to be just $20,800 per year, or less than the poverty line for a family of four.The majority of people get benefits that are substantially lower than that. You think any of those people have been able to sock any of that away?
Without the unemployment benefit, people will have to either go on food stamps -- although the House under the Ryan Budget is trying to reduce those -- or will have to go to food banks, rather than Safeway ([url=http://www.zacks.com/stock/quote/swy]SWY[/url]) to get their food. As it is, 39.6 million Americans are currently on food stamps -- about one in seven -- and that number is up 11.6% over the last year.
If the extended benefits stop at the end of the year it is going to result in still more people out of work, in addition to the increased hardship for those who lose the benefits. Come January, there will be 3.598 million more people who are not even getting that below-poverty level income unless benefits are extended again.
There is a concern that by cushioning the blow of unemployment, people might be more reluctant to take a marginal job opportunity, but a below-poverty-level income is not that much of a cushion. It might have some of that effect at the very low end of the job market -- people earning around minimum wage -- but not for the vast majority of jobs out there. I’m not sure it is good for the economy for highly skilled people to be taking jobs in other fields that have no use of those skills, and then be unavailable when those skills are needed again.
The people who get extended benefits tend to spend the money quickly on basic needs. This, in turn, keeps customers coming in the door at Costco ([url=http://www.zacks.com/stock/quote/cost]COST[/url]) and Big Lots ([url=http://www.zacks.com/stock/quote/big]BIG[/url]). It means that, at the margin, some people are able to continue to pay their mortgages and thus helps keep the foreclosure crisis from getting even worse than it already is.
However, by the time they are well into extended benefits, they might also be spending food stamps as well as the unemployment check at Kroger’s ([url=http://www.zacks.com/stock/quote/kr]KR[/url]). These customers keep the people at Costco, Big Lots and Safeway, and of course their competitors, employed. It also keeps the people who make and transport those goods employed as well, although in that case much of the stimulus is lost overseas if the goods are imported.
Discouraging, but Not Unexpected
The four-week average staying above the 400,000 level is a discouraging, but not unexpected, sign. In the last two recoveries, when it got below that threshold, that job creation really started to take off.
Declining continuing and extended claims numbers are a good thing, but only if people are leaving the rolls for the “right" reason. If they are leaving for the "wrong" reason -- because the benefits have simply run out -- the declines are not really good news (even if they do help reduce government spending); they are just a reflection of millions of people slipping into poverty. Hardly a thing to celebrate.
While some of the headwinds facing the economy, such as the spike in oil prices earlier this year and the supply chain disruptions from Japan are temporary and will fade soon, others are likely to last much longer. Chief among these are a fiscal policy that is turning very concretionary (especially at the State and Local level), precisely the wrong medicine for this economy.