Initial Claims for Unemployment Insurance fell to 451,000, a drop of 27,000 from last week. That is good news, but only in terms of the direction. After several weeks in a row of new claims shooting higher, the upward momentum has been reversed, with three straight weeks of declines -- but initial claims remain far too high.
The four-week moving average fell by 9,250 to 477,750. After falling sharply in the second half of last year, the four-week moving average had seemed to be trapped in a tight “trading range.” A few weeks ago it threatened a breakout to the upside. (See graph below from http://www.calculatedriskblog.com/), but now we are smack dab right in the middle of it again.
While we are still comfortably below the year-ago level of 566,500 on the moving average, back then the average was falling fast. To really start to put a dent in the vast army of the unemployed, we really need to see the four week average fall below 400,000 level. If the four-week average moves above the 500,000 level and stays there, it seriously increases the risk of a double-dip recession. The current level is consistent with the sort of “semi-recovery” the economy has been in for most of the year.
Continuing Claims
The news on Continuing Claims was more neutral. Regular continuing claims fell by 2,000 to 4.478 million. That is down 1.557 million or 25.8% from a year ago. That, however, gives a very incomplete picture of what is going on. Regular continuing claims are paid by the state unemployment insurance funds and only last for 26 weeks.
In August, half of all the unemployed had been out of work for more than 19.9 weeks, and 42.0% had been out of work for more than 26 weeks. While the last two months have seen a dramatic decline in the median duration of unemployment (it was 25.5 weeks in June), it remains far higher than any level seen prior to the Great Recession (the previous record was 12.3 weeks).
After the 26 week mark is hit, people move over to extended unemployment claims, paid for by the federal government, provided that they are available. In every recession since the end of WWII, Congress has extended benefits. However, a few months ago, an extension of benefits was filibustered in the Senate, and the benefits ended for millions. That filibuster was eventually overcome, and now those people are streaming back on to the extended benefit rolls.
This week (actually two weeks ago, as the extended claims data is a week behind the regular continuing claims data, and two weeks behind the initial claims data) that return process seems to have finished. Extended claims rose by 29,000 to 5.470 million. That is 1.810 million higher than it was in mid-July, which was the low point in extended claims due to the filibuster shutdown. It is also 1.681 million (44.4%) higher than a year ago.
Total Number Receiving Unemployment Benefits
A better way to look at the data is the total number of people getting unemployment benefits, regardless if the state government pays, or the federal government does. On that basis, total claims fell by 27,000 in the last “week” and are 128,000 (1.3%) higher than a year ago. What is not known is the total number of people who’s benefits have run out and thus are not being counted. If it is because they found new jobs, then it is great news.
But extended benefits do not last forever. The maximum -- which only applies to the areas of the country with the highest unemployment -- is 99 weeks, or just short of two years. The economy was already in recession two years ago, and we are coming up on the two-year anniversary of the collapse of Lehman Brothers, etc. That is when the economy really fell off the cliff. If people are simply “aging out” of the system, that is very bad news, mostly for them, but also for the economy as a whole.
Clearly it is not good to have so many people unemployed, but it is better that people are getting benefits rather than being left with no income at all. Unemployment generally (it varies a bit by state) pays 60% of what people were earning before they got laid off, up to a cap of about $400 per week, or $21,000 per year. If we assume that the average benefit is $300 per week, then it means that $2.6 billion a month more is being pumped into the economy. It is going to people who will spend that money right away.
That means more business for Wal-Mart (WMT) and Big Lots (BIG). It means that these people are able to continue paying their mortgage or rent and don’t become homeless. It means that their electricity is not shut off. It means that they still can have an Internet connection from which they can continue looking for work.
It is not just the humanitarian benefit of making sure that our fellow citizens do not slip into third world style poverty, it is that the money gets pumped into the economy -- and as it is, it keeps other people working. It is for that reason that the non-partisan CBO has found that extended unemployment benefits is among the most effective programs around at stimulating the economy on a job saved per dollar spent basis. Moody’s Analytics has come to similar conclusions. The table below is from the New York Times and based on Moody’s data.
A Better Bang for the Buck
Note that extending unemployment benefits is far more effective on a "bang for the buck" basis at raising GDP growth than is any tax cut, particularly extending the Bush tax cuts. The John Boehner (R-OH) “two step” plan of reducing non-security spending back to 2008 levels and keeping all the tax levels unchanged for the next two years (which presumably also means an estate tax of zero) looks almost like a deliberate attempt to sabotage the economy in the light of these “bang for the buck” measures of types of fiscal stimulus.
Food stamps would be cut drastically -- not just the increased amount per person that were part of the ARRA, but since then number of people getting food stamps has increased dramatically during the Great Recession, the level would have to be cut well below that to bring the total amount spent back to 2008 levels. In September 2007, there were 26 million people on Food Stamps, by September 2008, that number had climbed to 31 million, and by June 2010, the latest data available, the number was up to 41 million.
Thus to get spending down to 2008 levels, not only would the 12% increase in the level have to be rolled back, but benefits per person would have to be chopped by 24.4%. Thus we replace $1.72 worth of economic activity for each dollar of spending with $0.35 per dollar spent. Extended benefits would have to be cut off, removing $1.60 of activity with that $0.35 worth of economic activity.
While one should generally not ascribe malice to that which can be explained by incompetence, I have to say that it is hard to do so in such a situation. Is it really possible that the potential future Speaker of the House is that totally ignorant of basic economics? It is just basic bad economics, in addition to the extreme humanitarian hardship that it would cause.
Clearly, though, getting an unemployment check is not a good substitute for actually having a job. Being on unemployment means a minimum 40% cut in your income, and for most people much more than that. People don’t know how long they are going to be out of work.
In this downturn, the average duration of unemployment has been so much worse than ever before (OK, we don’t have the data for the Depression, but since WWII). It is a pretty fair bet that most have been looking much longer than they expected to be when they first got laid off. That means they have probably already depleted all of their savings outside of their 401-K plans, and probably dipped heavily into those as well.
Keep in mind that the savings rate in the country before the recession hit was at extremely low levels. What saving the nation was doing was very concentrated among those with high incomes. Thus the people who are out of work are probably not the ones who had a lot of savings. The long-term unemployed have also probably maxed out their credit cards by the time they have been out of work for six months or more. Without unemployment benefits they would be left with no financial resources at all.
A Band-Aid, Not a Cure
Extended unemployment benefits are a band aid, not a cure. Band-aids are useful items to have in a first aid kit as they prevent infection, but the injury requires more to heal than a band aid. Extended benefits don’t bring the psychological rewards that actually having a job has, in addition to paying much less than a real job would.
When people are out of work for extended periods, their skills deteriorate and their contacts grow stale. They become less employable. The longer you are out of work, the lower your salary is likely to be when you do find a new job. From the economy’s point of view, this idleness is simply a loss of production that can never be made back up.
We need to be doing more to stimulate actual employment. With consumers (with jobs) trying hard to save and deleverage their personal balance sheets, they are not spending the way they used to. While building up your savings is a good thing on a personal level, when everyone is doing it at the same time, it results in a sharp slowdown in the economy. With the consumer being over 70% of the economy, when spending turns down, the economy will as well. Extended benefits do help prop up consumer spending, but relative to the increase in the savings rate, it doesn’t do that much.
Of course, if consumers are not spending, and are not likely to start spending in the near future, then business will have no reason to invest (except perhaps in equipment that can cut costs, by substituting capital for labor) regardless of how low the cost of capital gets. The proposal to let businesses expense equipment purchased in 2011 might help at the margin, but it will mostly pull forward equipment spending that might otherwise been done in 2012.
While that would be worthwhile, and it will help at the margin, don’t expect miracles from the proposal (for more on this see "Equipment Expensing as Low-Cost Financing"). What do you say to the lathe salesman when he tries to sell your business a new lathe, and 6 of the 20 lathes you already have are sitting around gathering dust from a lack of demand for your goods? Would it really matter to you if you could finance the purchase at just 1% for five years? Probably not.
Overall, this report was encouraging, but it is hard to be enthusiastic. It is more like relief that things were not continuing to get worse, than any real feeling about things getting better. While this was the third week in a row of declining claims, we need to see a steady pattern of declines in the initial claims numbers to start to get enthusiastic. That however is one very large IF. Three weeks is a start, but just a start.
The four-week moving average fell by 9,250 to 477,750. After falling sharply in the second half of last year, the four-week moving average had seemed to be trapped in a tight “trading range.” A few weeks ago it threatened a breakout to the upside. (See graph below from http://www.calculatedriskblog.com/), but now we are smack dab right in the middle of it again.
While we are still comfortably below the year-ago level of 566,500 on the moving average, back then the average was falling fast. To really start to put a dent in the vast army of the unemployed, we really need to see the four week average fall below 400,000 level. If the four-week average moves above the 500,000 level and stays there, it seriously increases the risk of a double-dip recession. The current level is consistent with the sort of “semi-recovery” the economy has been in for most of the year.
Continuing Claims
The news on Continuing Claims was more neutral. Regular continuing claims fell by 2,000 to 4.478 million. That is down 1.557 million or 25.8% from a year ago. That, however, gives a very incomplete picture of what is going on. Regular continuing claims are paid by the state unemployment insurance funds and only last for 26 weeks.
In August, half of all the unemployed had been out of work for more than 19.9 weeks, and 42.0% had been out of work for more than 26 weeks. While the last two months have seen a dramatic decline in the median duration of unemployment (it was 25.5 weeks in June), it remains far higher than any level seen prior to the Great Recession (the previous record was 12.3 weeks).
After the 26 week mark is hit, people move over to extended unemployment claims, paid for by the federal government, provided that they are available. In every recession since the end of WWII, Congress has extended benefits. However, a few months ago, an extension of benefits was filibustered in the Senate, and the benefits ended for millions. That filibuster was eventually overcome, and now those people are streaming back on to the extended benefit rolls.
This week (actually two weeks ago, as the extended claims data is a week behind the regular continuing claims data, and two weeks behind the initial claims data) that return process seems to have finished. Extended claims rose by 29,000 to 5.470 million. That is 1.810 million higher than it was in mid-July, which was the low point in extended claims due to the filibuster shutdown. It is also 1.681 million (44.4%) higher than a year ago.
Total Number Receiving Unemployment Benefits
A better way to look at the data is the total number of people getting unemployment benefits, regardless if the state government pays, or the federal government does. On that basis, total claims fell by 27,000 in the last “week” and are 128,000 (1.3%) higher than a year ago. What is not known is the total number of people who’s benefits have run out and thus are not being counted. If it is because they found new jobs, then it is great news.
But extended benefits do not last forever. The maximum -- which only applies to the areas of the country with the highest unemployment -- is 99 weeks, or just short of two years. The economy was already in recession two years ago, and we are coming up on the two-year anniversary of the collapse of Lehman Brothers, etc. That is when the economy really fell off the cliff. If people are simply “aging out” of the system, that is very bad news, mostly for them, but also for the economy as a whole.
Clearly it is not good to have so many people unemployed, but it is better that people are getting benefits rather than being left with no income at all. Unemployment generally (it varies a bit by state) pays 60% of what people were earning before they got laid off, up to a cap of about $400 per week, or $21,000 per year. If we assume that the average benefit is $300 per week, then it means that $2.6 billion a month more is being pumped into the economy. It is going to people who will spend that money right away.
That means more business for Wal-Mart (WMT) and Big Lots (BIG). It means that these people are able to continue paying their mortgage or rent and don’t become homeless. It means that their electricity is not shut off. It means that they still can have an Internet connection from which they can continue looking for work.
It is not just the humanitarian benefit of making sure that our fellow citizens do not slip into third world style poverty, it is that the money gets pumped into the economy -- and as it is, it keeps other people working. It is for that reason that the non-partisan CBO has found that extended unemployment benefits is among the most effective programs around at stimulating the economy on a job saved per dollar spent basis. Moody’s Analytics has come to similar conclusions. The table below is from the New York Times and based on Moody’s data.
A Better Bang for the Buck
Note that extending unemployment benefits is far more effective on a "bang for the buck" basis at raising GDP growth than is any tax cut, particularly extending the Bush tax cuts. The John Boehner (R-OH) “two step” plan of reducing non-security spending back to 2008 levels and keeping all the tax levels unchanged for the next two years (which presumably also means an estate tax of zero) looks almost like a deliberate attempt to sabotage the economy in the light of these “bang for the buck” measures of types of fiscal stimulus.
Food stamps would be cut drastically -- not just the increased amount per person that were part of the ARRA, but since then number of people getting food stamps has increased dramatically during the Great Recession, the level would have to be cut well below that to bring the total amount spent back to 2008 levels. In September 2007, there were 26 million people on Food Stamps, by September 2008, that number had climbed to 31 million, and by June 2010, the latest data available, the number was up to 41 million.
Thus to get spending down to 2008 levels, not only would the 12% increase in the level have to be rolled back, but benefits per person would have to be chopped by 24.4%. Thus we replace $1.72 worth of economic activity for each dollar of spending with $0.35 per dollar spent. Extended benefits would have to be cut off, removing $1.60 of activity with that $0.35 worth of economic activity.
While one should generally not ascribe malice to that which can be explained by incompetence, I have to say that it is hard to do so in such a situation. Is it really possible that the potential future Speaker of the House is that totally ignorant of basic economics? It is just basic bad economics, in addition to the extreme humanitarian hardship that it would cause.
Clearly, though, getting an unemployment check is not a good substitute for actually having a job. Being on unemployment means a minimum 40% cut in your income, and for most people much more than that. People don’t know how long they are going to be out of work.
In this downturn, the average duration of unemployment has been so much worse than ever before (OK, we don’t have the data for the Depression, but since WWII). It is a pretty fair bet that most have been looking much longer than they expected to be when they first got laid off. That means they have probably already depleted all of their savings outside of their 401-K plans, and probably dipped heavily into those as well.
Keep in mind that the savings rate in the country before the recession hit was at extremely low levels. What saving the nation was doing was very concentrated among those with high incomes. Thus the people who are out of work are probably not the ones who had a lot of savings. The long-term unemployed have also probably maxed out their credit cards by the time they have been out of work for six months or more. Without unemployment benefits they would be left with no financial resources at all.
A Band-Aid, Not a Cure
Extended unemployment benefits are a band aid, not a cure. Band-aids are useful items to have in a first aid kit as they prevent infection, but the injury requires more to heal than a band aid. Extended benefits don’t bring the psychological rewards that actually having a job has, in addition to paying much less than a real job would.
When people are out of work for extended periods, their skills deteriorate and their contacts grow stale. They become less employable. The longer you are out of work, the lower your salary is likely to be when you do find a new job. From the economy’s point of view, this idleness is simply a loss of production that can never be made back up.
We need to be doing more to stimulate actual employment. With consumers (with jobs) trying hard to save and deleverage their personal balance sheets, they are not spending the way they used to. While building up your savings is a good thing on a personal level, when everyone is doing it at the same time, it results in a sharp slowdown in the economy. With the consumer being over 70% of the economy, when spending turns down, the economy will as well. Extended benefits do help prop up consumer spending, but relative to the increase in the savings rate, it doesn’t do that much.
Of course, if consumers are not spending, and are not likely to start spending in the near future, then business will have no reason to invest (except perhaps in equipment that can cut costs, by substituting capital for labor) regardless of how low the cost of capital gets. The proposal to let businesses expense equipment purchased in 2011 might help at the margin, but it will mostly pull forward equipment spending that might otherwise been done in 2012.
While that would be worthwhile, and it will help at the margin, don’t expect miracles from the proposal (for more on this see "Equipment Expensing as Low-Cost Financing"). What do you say to the lathe salesman when he tries to sell your business a new lathe, and 6 of the 20 lathes you already have are sitting around gathering dust from a lack of demand for your goods? Would it really matter to you if you could finance the purchase at just 1% for five years? Probably not.
Overall, this report was encouraging, but it is hard to be enthusiastic. It is more like relief that things were not continuing to get worse, than any real feeling about things getting better. While this was the third week in a row of declining claims, we need to see a steady pattern of declines in the initial claims numbers to start to get enthusiastic. That however is one very large IF. Three weeks is a start, but just a start.
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.