Back to top

Analyst Blog

Initial Claims for Unemployment Insurance fell by 42,000 last week to 415,000 (last week was revised up by 3,000, so one could see it as a 39,000 decline). This was a bit better than the expected level of 425,000.

This is a welcome turnaround, but only partially negates last week’s big increase. This is a series that tends to be a bit on the flakey side around the holidays. That, however, does not start to describe the recent behavior of this series, as it has been downright erratic.

The Yo-Yo Effect

Normally one would get excited about a drop of this magnitude, but this just seems like the yo-yo going down again. We had a big drop during the Christmas week to 388,000, and then big increases over two weeks, and a big decline of 37,000 two weeks ago, then a massive increase last week of 57,000 and now it's going down again.

The overall direction of initial claims still seems to be downward, but it getting very hard to tell. It looked like we had gotten out of the “trading range” that initial claims have been in for the last year. Initial claims had been generally trending down since they hit a secondary peak of 504,000 (after revisions) on 8/14 of last year. It seems likely that the harsh winter weather and the holidays may be playing a role in the erratic behavior.

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 by 1,000 to 430,500.

Jobs Growth Still Weak

The economy is growing, but not at the sort of rate needed to add a significant number of jobs and to put a dent in the huge army of the unemployed. This is the final appetizer before we get to the main course tomorrow of the BLS employment report. That report will go a long way towards determining if we will break out of this pseudo-recovery and finally get the country back to work.

The December employment report was a bit disappointing, especially after the ADP ([url=]ADP[/url]) report showing an increase of 297,000 private sector jobs. Instead the total was just 103,000 jobs, with 113,000 from the private sector. Yesterday, ADP again provided an upbeat report, with a forecast of 187,000 private sector jobs created in January (although they did revise down the December number to 247,000).

In December, there was a big drop in the unemployment rate, but that was partly a function of a declining participation rate. Still, we do seem to be back on the path of job creation, and the longer-term trend of initial claims is still down.

Relative to a year ago, the four-week moving average is down by 50,750 or 10.5%. The graph below charts the path of the four week average (from this source).

Continuing Claims

The data on regular continuing claims was also encouraging. Regular continuing claims for unemployment insurance fell by 84,000 to 3.925 million. They are down by 941,000  or 19.3% from a year ago.

Regular claims are paid by the state governments, and run out after just 26 weeks. The second 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. But it also shows how things at the regular state unemployment benefit level have been getting much better over the last year (though still well above the peaks of the last two recessions).

However, in December, half of all the unemployed had been out of work for 22.4 weeks (down from 25.5 weeks in June, but up from 21.7 weeks in November), and 44.3% 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 44.3% of the unemployed paints a very incomplete picture. 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, recently even the extended claims have started to trend down, though in an irregular fashion.  They (the two largest programs combined) fell by 68,000 to 4.551 million. Relative to a year ago they are down 1.303 million, or 22.3%.

A much better measure is the total number of people getting benefits, regardless of which level of government pays for them. Combined, regular claims and extended claims (including a few much smaller programs) fell by 112,000 on the week and are down 2.289 million or 19.8% over the 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 comparison. In addition, the continuing claims data are a week behind the initial claims, and extended claims are a week behind the extended claims data. Normally that is not a huge issue, but given the recent volatility it is more significant).

Extended Claims Part of Tax Cut Deal

The recent deal President Obama made with the GOP to extend the Bush tax cuts for all for two years included an extension of unemployment benefits until the end of 2011. 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.

The tax deal prevented 2 million people from losing this last financial lifeline. The downside to the deal was that it will reverse the downward trend in the budget deficit and cause the deficit to be higher in fiscal 2011 than it was in fiscal 2010, probably exceeding the 2009 record deficit.

Some claim that the long duration of unemployment benefits has actually discouraged people from looking for work -- that people are content to live forever on 60% of their previous income, or $400 per week, whichever is lower. The average benefit is only about $300 a week. Ask yourself, how well could you live on $300 per week?

The JOLTS report showed that in November there were still 4.6 people unemployed for each job opening. Just telling all of them to “get a job” isn’t going to cut it.

The extension of benefits is one of the key reasons that initial claims are falling. The fact that extended claims have not increased significantly in the wake of the extension is very good news.

It is worth noting that even with the deal there will be large numbers of people who lose their benefits. Those are the "99ers." The 99 weeks of benefits they get works out to be just short of two years. The heaviest period of lob losses in the Great Recession was two years ago. Many of those people have still not found jobs, and as time goes by they become less and less attractive to employers.

Extended Claims = Effective 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. You think any of those people have been able to sock any of that away?

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. 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 Wal-Mart (WMT - Free Report) and Family Dollar . 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 (KR - Free Report) . These customers keep the people at Wal-Mart, Family Dollar and Kroger’s -- 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.

However it is not clear if the marginal propensity to import is higher for poor (or temporarily poor because they are unemployed) or for the rich. Lots of the stuff on the shelves of Wal-Mart comes from China. On the other hand, the poor are not likely to be buying Swiss watches or German autos. They will not be buying absolutely frivolous things like Fiji water imported from halfway around the world.

What is clear is that they will spend it quicker, increasing the velocity of money, than will the rich who will tend to save more of it, particularly if they see the increased income from, say, a continued tax cut for the highest income people as temporary. The rich are much more likely, in other words, to fit Milton Friedman’s “Permanent Income Hypothesis” than are the unemployed, since the rich do not face liquidity constraints.

Also, if you remember your Friedman, velocity of money counts, and it counts a great deal. P * Q = M * V. Price times quantity in the aggregate is nominal GDP, and it is equal to the amount of money in circulation times how quickly it changes hands. Money in the hands of the unemployed has a much higher velocity than money in the hands of a multi-millionaire.

In addition to being a good source of economic stimulus, and thus benefiting those who are still employed, there is the obvious benefit to those that get the benefits. While we don’t want unemployment insurance to become a back-door form of welfare and all the dependency issues that raises, unemployment benefits help keep people out of poverty, especially in a deep recession.

In 2009, it helped keep 3.4 million people out of poverty, up from 900,000 in 2008, and under 500,000 in 2007. This is shown in the graph below (from here). Presumably the number will be just as large for 2010 as it was for 2009.

There really is not good way to tell from this report if the decline in the number of people receiving benefits is due to them getting new jobs, or due to even the extended benefits running out. If it is the former, it is very good news. If it is the latter, it just means more people are falling into absolute destitution. That is not good news for either the economy or for social stability.

Both the rise in the unemployment duration numbers and the falling civilian participation rate (it fell to 64.3% in December from 64.5% in November, which accounted for more than half of the drop in the unemployment rate from 9.8% to 9.4%) would suggest that it is the unhappy latter case that is happening.

The longer-term trend is very much in the right direction. These numbers are still being affected by the bad weather we have been having, so the numbers will have to be watched closely over the next few weeks.

We really need to see the four-week average fall below the 400,000 level and stay there is we are going to climb the stairway to heaven of a rapidly falling unemployment rate. If it shoots above 500,000 then we are on the Highway to Hell. The current level, especially the current weekly number, puts us squarely back into the purgatory of a pseudo recovery. Hopefully this is all just a case of bad weather, and things will get better next week, but based on the recent behavior of the data, who knows what it is going to do?

In-Depth Zacks Research for the Tickers Above

Normally $25 each - click below to receive one report FREE:

Automatic Data Processing, Inc. (ADP) - free report >>

Wal-Mart Stores, Inc. (WMT) - free report >>

Kroger Company (The) (KR) - free report >>