Extended Claims Soar - Analyst Blog

Initial Claims for Unemployment Insurance edged up by 2,000 last week to 484,000. The four-week moving average increased by 14,250 to 473,500. Both are at the high end of the "trading range" that they have been in since the start of the year, which followed a steep drop in the last half of 2009. The path of the four week moving average is shown in the graph below (from http://www.calculatedriskblog.com/).

The slight rise in the weekly numbers was a bit of a disappointment as the consensus expectation was for a decline to 465,000. This is more evidence that job creation is very lackluster. To signal a healthy labor market, we really need the level of initial claims to drop below 400,000. This recovery seems to be following the path of the previous two recoveries, in contrast to the recoveries earlier in the post war era that were far more V shaped rather than U shaped.

Assuming that the NBER eventually decides that the recession officially ended last July, we have actually seen fewer private job losses over the last 13 months than we did in the 13 months following the last two downturns (see Post-Recession Private Job Growth). That, however, is cold comfort to the millions who are out of work, and have been out of work for far longer than in any previous downturn.

The news on continuing claims was a bit more encouraging, but at this point regular state-based continuing claims do not paint a very complete picture. They run out after 26 weeks and, in July, half of all the unemployed had been out of work for more than 22.2 weeks. Regular continuing claims fell by 118,000 to 4.452 million. Relative to a year ago, there has been great progress on the continuing claims front, with the total down by 1.671 million or 27.3%.

That does not mean that 118,000 people who were getting unemployment benefits last week of 1.671 million who were getting them a year ago have found new jobs. For the majority it probably means that they have crossed over the 26-week threshold and now have to move on to the extended benefit program. Extended benefits are paid for by the Federal government and are extended at times of high unemployment. In some high unemployment states, the total length of benefits can be as long as 99 weeks.

The big story in this week's report comes from the extended benefit side. Due to a filibuster in the Senate, the extended benefits had been allowed to lapse for many people starting in May. As a result people fell off the extended benefit rolls and were left with no income at all. The filibuster was finally overcome a few weeks ago, and those people are flooding back into the system. The extended benefit data is one week behind the regular continuing claims data, and two weeks behind the initial claims data. We started to see the effects of people returning to extended claims with a rise of 280,000 last week. That was a mere drop in the bucket compared to what we saw this week. Extended claims soared by 1.339 million to 5.281 million. That is a 58% increase in just one week.

The better way to look at the data is to combine the continuing and extended claims number to get the total number of people getting unemployment benefits. Ignoring the report timing issues, this week 9.733 million people were getting unemployment benefits, up 1.221 million from 7.913 million last week. Relative to a year ago, when there were 9.535 million getting benefits, the picture is essentially unchanged. The composition has shifted though. A year ago, 35.8% of those getting benefits were getting them from the Federal government; today the Federal government is picking up the tab for 54.3% of the unemployed.

While the level of benefits vary a bit by state, unemployment benefits pay, in general, about 60% of the income someone was making while they were employed, up to a limit of about $400 a week, or $21,000 a year. A 40% drop in income will force most people to have to dig into their savings and rely more on their credit cards. Aside from the very wealthy, few people had substantial savings outside of retirement accounts going into the recession. The savings rate was at record lows as people thought they would be able to rely on home price appreciation to finance retirement and to pay for their kids’ college educations.

The bursting of the housing bubble changed all that. In past downturns, unemployed homeowners would be able to tap into their home equity by taking out a second mortgage or a home equity line of credit to see them through the tough times of having one or both of the breadwinners in the family out of work. With almost one in four homes with mortgages now underwater, and millions more just barely above the waves, that option is no longer open for them.

Extended benefits are an effective form of economic stimulus since the people getting them will spend it quickly, and will spend them on basic necessities. They will be able to buy some food and school supplies at Wal-Mart (WMT) rather than have to rely on the local food bank. That keeps people at Wal-Mart employed.

It also helps the factories that make those school supplies running. They are able to pay their utility bills rather than having their power shut off and their phones disconnected. That helps Verizon (VZ) and AT&T (T). Think how hard it would be to find a new job if you had no phone and the only internet access you had was the local library (oh sorry, the library closed due to local budget deficits). They are able to continue paying their mortgages, rather than defaulting on them and thus making the housing situation worse.

Extended benefits will not solve the problem with the economy, but they are a big help in preventing it from getting worse. They are a band aid, not a cure, but a band aid prevents the cut from getting infected while the healing process is underway. When the Senate ripped the band aid off by letting benefits expire, it was very bad news for the economy. It partially explains the slowdown in consumer spending that we have seen over the past few months. Millions of people were left with no income at all, and thus could not spend.

Of course, extended benefits are a poor substitute for what people really need: a new job. Unemployment benefits do not have the same psychological benefits that a job brings, and we don't want to see them turn into a backdoor form of welfare. The longer people are unemployed, the more their skills and contacts erode, and the less employable they become. The fresh band aid will help, but more needs to be done.

 
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