Initial Jobless Claims Bounce Back - Analyst Blog - Kroger (NYSE:KR), New York Times (NYSE:NYT)

The

Initial Claims for Unemployment Insurance

yo-yo headed back up this week, rising 19,000 to 479,000. The four-week moving average rose by 5,250 to 458,500. After a sharp decline in the second half of 2009 (

see graph below

), the four-week average has found a bumpy high plateau since the start of 2010.

This high plateau is similar to the pattern after the 1991 and 2001 recessions, but very different from earlier post-war recessions where once the claims started down, they kept falling until they were at approximately their pre recession levels. While we are in much better shape than we were a year ago when the four-week average was at 559,750, it is not good enough. We probably need to see the four week moving average get below the 400,000 level to indicate that the economy is healthy enough to make a meaningful dent in the unemployment rate.

The rise in initial claims this week is disappointing, but they still remain in the tight “trading range” they have been in since the start of the year. Don’t get too excited or upset unless they break out of this range.

Continuing Claims

The news on the Continuing Claims front was mixed. Regular state claims for unemployment insurance fell by 34,000 to 4.537 million. That is 1.656 million, or 26.7%, below a year ago. However, the state-based unemployment insurance programs run out after 26 weeks. In June, half or all the unemployed had been out of work for 25.5 weeks.

The median duration of unemployment is more than twice the highest level ever recorded before the Great Recession. As a method of judging the state of the labor market, a measure that excludes almost half of the unemployed is clearly flawed. During recessions, Congress always has provided extended unemployment benefits, where the Federal Government picks up the tab after the 26 weeks or regular benefits are exhausted.

In this downturn, there are four different tiers of extended benefits, and can last up to a total (including state benefits) of 99 weeks for those living in high unemployment areas. However, the money for those ran out for awhile, and the Senate delayed passing an extension due to a filibuster. While the filibuster was eventually overcome and the extended benefits were renewed, during the hiatus hundreds of thousands were thrown off the rolls. They are “now” coming back on (there is a two-week time lag in the data on extended claims).

As a result, the number of people getting extended benefits rose by 280,000 to 3.918 million, a level that is 340,000 higher than a year ago. Probably the best way of looking at the Continuing Claims data is to look at the total number of people getting benefits, both regular and extended. That now stands at 8.453 million, an increase of 246,000 over last week but down 1.316 million or 13.5% from a year ago.

Unemployment benefits are what economists refer to as “automatic stabilizers.” If overall demand in the economy is so weak that people are getting laid off, if they are left with no income then demand will fall still further, thus setting off a vicious downward cycle.

When the economy turns down and it needs some stimulus to keep it going, the payments rise, pumping more money into the economy without policy makers having to do anything. Well, at least not do anything until the regular claims run out.

The Importance of Extended Claims

In a recession, providing extended claims is not just a humanitarian thing to do, it is also good economics. While things vary a bit from state to state, generally unemployment pays 60% of what the person was earning before they got laid off, up to a cap of about $400 per week. That works out to $21,000 per year. For most people, that means that they will have to both drastically cut back on their expenses, and tap their savings/run up debt during the regular unemployment benefit period.

After six months of doing that, the savings are likely to be depleted and the credit cards more or less maxed out. If they are then left with no income at all, they are destitute.

This recent article

from the

New York Times

(

NYT

) is worth reading in that regard.

With no income or other financial resources to draw on, people need to get their food from food banks instead of

Kroger’s

(

) or

Wal-Mart

(

WMT

). That means fewer customers, and thus the need for fewer employees at Wal-Mart. The ex-Wal-Mart employees thus join the unemployment lines, and eventually their benefits run out, and the downward spiral continues. The non-partisan Congressional Budget Office has scored extended benefits as one of the most effective programs at stimulating the economy on a job saved or created per dollar spent basis.

Extended Benefits vs. Bush Tax Cuts

While extended benefits do add to the deficit, the bond market is clearly NOT worried about the deficit. People are willing to lend to the U.S. government at nearly the lowest interest rates in history, and not just short term, but for 10 or 30 years. Extending unemployment benefits increases the deficit a small fraction of what extending the Bush tax cuts for the highest income 2% increases the deficit, and is FAR more effective at getting the economy moving.

Give $400 a week to someone with no other income and they will spend it immediately, thus stimulating the economy, and they will spend it on basic needs. Give that same $400 a week to someone who is already making $9000 a week (through tax cuts), and they will tend to save it, or if they do spend it, they will spend it on ostentatious displays of wealth with very little real utility. Seriously, what is the purpose of a Rolex watch over that of a Timex other than to say “I’m rich”?

It is hard to take seriously those who rail against the deficit when it comes to extending unemployment benefits or aiding State governments so teachers don’t have to be laid off, but then insist that extending tax cuts don’t matter to the deficit, and don’t have to be offset. The proper response to such people should be laughter, not respectful questioning by David Gregory on Meet the Press on Sunday Morning.

Extended benefits help the economy; the humanitarian benefit of not having our fellow citizens live in third world type poverty is just a bonus.

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.

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