Initial Claims for Unemployment Insurance rose by 26,000 last week to 436,000 (last week was also revised up by 3,000, so one could see it as a 29,000 increase). This was worse than the expected level of 422,000.
Last week's big surprise to the downside seems to have been a bit of a mirage. However, it still looks like we might get out of the “trading range” that initial claims have been in for the last year. Initial claims have been generally trending down since they hit a secondary peak of 504,000 (after revisions) on 8/14. The path has, however, been erratic.
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 fell by 5,750 to 431,000. After declining sharply in the second half of 2009, the four-week moving average has been stuck in a tight trading range, but now we seem to broken clearly below the previous lows in the range.
Though we may yet be stuck in a pseudo recovery, if the overall current downward trend can be sustained, there is real hope. The economy is growing, although 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.
In hindsight, the run-up to 500,000 seems to be mostly a function of the Census workers being laid off (they are almost all gone now, and the Census was completed quicker, and at less cost than anyone had expected). As that effect waned, we returned to the previous baseline.
Relative to a year ago, the four-week moving average is down by 61,000 or 12.4%. The graph below (from http://www.calculatedriskblog.com/) charts the path of the four week average since the start of the century.
Continuing Claims
The data on regular continuing claims was also a bit disappointing. Regular continuing claims for unemployment insurance rose by 53,000 to 4.270 million. They are down by 1.25 million or 22.6% from a year ago.
Regular claims are paid by the state governments, and run out after just 26 weeks. However, in October, half of all the unemployed had been out of work for 21.2 weeks (down from 25.5 weeks in June, but up from 20.4 weeks in September), and 41.8% had been out of work for more than 26 weeks.
One of the things I will be looking for tomorrow in the employment report is if there has been renewed progress on the duration of unemployment front. 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 41.8% of the unemployed paints a very incomplete picture.
Extended Benefits and Their Lapse
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. However, recently, even the extended claims have started to trend down, but in an irregular fashion. This week, they (the two largest programs combined) bounced back up by 235,000 to 4.900 million and are up by 487,000, or 11.0% over the past year.
A much better measure is the total number of people getting benefits, regardless of which level of government pays for them. Including a few other minor programs, claims rose by 377,000 in the last week, but are down by 735,000 or 7.6% over the last year.
Congress has just let the extended benefits program lapse. Unless it can get its act together quickly, about 2 million people will lose this last financial lifeline.
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.
Right now, there are about five people out of work for each job opening. Just telling them all to “get a job” isn't going to work. Cutting off extended benefits is likely to cause initial claims to rise again. So while the extended benefits numbers are going to plunge over the next few weeks, don't read that as some sort of sign of renewed strength in the economy. Read it as a sign of callousness in Congress towards the plight of the people in this country who are really hurting.
"Are There No Workhouses?"
In the sprit of the season they are asking, “Are there no workhouses? Are there no prisons?” The answer to the first question, incidentally, is no; the answer to the second question is a very big yes, as we have the highest incarceration rate in the world. In that sense, the England of Dickens' day was more compassionate towards its downtrodden citizens that the Congress of today. Oh, but it is a moral imperative that $100,000 tax cuts for someone making a million bucks a year be continued forever.
Why do I say that the elimination of extended benefits will cause initial benefits to rise? Because extended unemployment benefits is dollar-for-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? Of course not. Without the unemployment benefit, people will have to either go on food stamps, although it is highly likely that the in coming Congress will try to reduce those, or will have to go to food banks rather than Kroger's (KR) to get their food.
Talk about a lump of coal in your stocking for Christmas! For millions of Americans, Christmas this year will resemble the one at Bob Cratchet's house. I just wouldn't count on a spiritually renewed Scrooge showing up after a fitful sleep with a big goose. Don't many of the policy makers who are most forcefully advocating cutting off benefits just in tome for the holidays consider themselves Christians? One wonders if they missed the sermon on the mount.
Extended Benefits Help the Economy
The vast majority of economists agree that extended unemployment benefits are among the most effective forms of economic stimulus. Although some do worry 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.
Also, over the long term, 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 for those skills, and then be unavailable once 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) and Big Lots (BIG).
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 these people are well into extended benefits, they might also be spending food stamps as well as the unemployment check at Kroger's. These customers keep the people at Wal-Mart, Big Lots 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 water imported from halfway around the world (like Fiji water).
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-millionare.
The Benefit of Good Will
In addition to being a good source of economic stimulus, and thus benefiting those that 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 second graph below (from http://www.cbpp.org/). Presumably the number will be just as large for 2010 as it was for 2009. Unless Congress acts, that number will fall sharply in 2011, and the number of people in poverty will surge.
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 from 64.7% in September to 64.5% in October) would suggest that it is the unhappy latter case that is happening.
The rebound in the weekly number is a disappointment, but the four-week average is still moving in the right direction, and is at its lowest level in over two years. That is highly encouraging, but I fear premature fiscal tightening will keep us stuck in economic purgatory of slow growth. That is better then being in the hell of a continuing recession, but far from the economic heaven of a real economic expansion that helps bring down the unemployment rate.
We really need to see the four-week average fall below the 400,000 level and stay there is we are going to climb that Stairway to Heaven. If it shoots above 500,000 then we are on the Highway to Hell.
Right now, though, it looks like we have a chance to break out of that rut, but just a chance. The cutting off of extended unemployment benefits will slow the economy, and may well result in a rebound in initial claims for unemployment insurance. However, for now the decline looks like a blessing to be thankful for. The question is, just how happy a New Year will it be for those thrown into abject poverty if all assistance ends and there are still no jobs to be found?
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KROGER CO (KR): Free Stock Analysis Report
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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 fell by 5,750 to 431,000. After declining sharply in the second half of 2009, the four-week moving average has been stuck in a tight trading range, but now we seem to broken clearly below the previous lows in the range.
Though we may yet be stuck in a pseudo recovery, if the overall current downward trend can be sustained, there is real hope. The economy is growing, although 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.
In hindsight, the run-up to 500,000 seems to be mostly a function of the Census workers being laid off (they are almost all gone now, and the Census was completed quicker, and at less cost than anyone had expected). As that effect waned, we returned to the previous baseline.
Relative to a year ago, the four-week moving average is down by 61,000 or 12.4%. The graph below (from http://www.calculatedriskblog.com/) charts the path of the four week average since the start of the century.
Continuing Claims
The data on regular continuing claims was also a bit disappointing. Regular continuing claims for unemployment insurance rose by 53,000 to 4.270 million. They are down by 1.25 million or 22.6% from a year ago.
Regular claims are paid by the state governments, and run out after just 26 weeks. However, in October, half of all the unemployed had been out of work for 21.2 weeks (down from 25.5 weeks in June, but up from 20.4 weeks in September), and 41.8% had been out of work for more than 26 weeks.
One of the things I will be looking for tomorrow in the employment report is if there has been renewed progress on the duration of unemployment front. 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 41.8% of the unemployed paints a very incomplete picture.
Extended Benefits and Their Lapse
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. However, recently, even the extended claims have started to trend down, but in an irregular fashion. This week, they (the two largest programs combined) bounced back up by 235,000 to 4.900 million and are up by 487,000, or 11.0% over the past year.
A much better measure is the total number of people getting benefits, regardless of which level of government pays for them. Including a few other minor programs, claims rose by 377,000 in the last week, but are down by 735,000 or 7.6% over the last year.
Congress has just let the extended benefits program lapse. Unless it can get its act together quickly, about 2 million people will lose this last financial lifeline.
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.
Right now, there are about five people out of work for each job opening. Just telling them all to “get a job” isn't going to work. Cutting off extended benefits is likely to cause initial claims to rise again. So while the extended benefits numbers are going to plunge over the next few weeks, don't read that as some sort of sign of renewed strength in the economy. Read it as a sign of callousness in Congress towards the plight of the people in this country who are really hurting.
"Are There No Workhouses?"
In the sprit of the season they are asking, “Are there no workhouses? Are there no prisons?” The answer to the first question, incidentally, is no; the answer to the second question is a very big yes, as we have the highest incarceration rate in the world. In that sense, the England of Dickens' day was more compassionate towards its downtrodden citizens that the Congress of today. Oh, but it is a moral imperative that $100,000 tax cuts for someone making a million bucks a year be continued forever.
Why do I say that the elimination of extended benefits will cause initial benefits to rise? Because extended unemployment benefits is dollar-for-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? Of course not. Without the unemployment benefit, people will have to either go on food stamps, although it is highly likely that the in coming Congress will try to reduce those, or will have to go to food banks rather than Kroger's (KR) to get their food.
Talk about a lump of coal in your stocking for Christmas! For millions of Americans, Christmas this year will resemble the one at Bob Cratchet's house. I just wouldn't count on a spiritually renewed Scrooge showing up after a fitful sleep with a big goose. Don't many of the policy makers who are most forcefully advocating cutting off benefits just in tome for the holidays consider themselves Christians? One wonders if they missed the sermon on the mount.
Extended Benefits Help the Economy
The vast majority of economists agree that extended unemployment benefits are among the most effective forms of economic stimulus. Although some do worry 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.
Also, over the long term, 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 for those skills, and then be unavailable once 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) and Big Lots (BIG).
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 these people are well into extended benefits, they might also be spending food stamps as well as the unemployment check at Kroger's. These customers keep the people at Wal-Mart, Big Lots 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 water imported from halfway around the world (like Fiji water).
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-millionare.
The Benefit of Good Will
In addition to being a good source of economic stimulus, and thus benefiting those that 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 second graph below (from http://www.cbpp.org/). Presumably the number will be just as large for 2010 as it was for 2009. Unless Congress acts, that number will fall sharply in 2011, and the number of people in poverty will surge.
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 from 64.7% in September to 64.5% in October) would suggest that it is the unhappy latter case that is happening.
The rebound in the weekly number is a disappointment, but the four-week average is still moving in the right direction, and is at its lowest level in over two years. That is highly encouraging, but I fear premature fiscal tightening will keep us stuck in economic purgatory of slow growth. That is better then being in the hell of a continuing recession, but far from the economic heaven of a real economic expansion that helps bring down the unemployment rate.
We really need to see the four-week average fall below the 400,000 level and stay there is we are going to climb that Stairway to Heaven. If it shoots above 500,000 then we are on the Highway to Hell.
Right now, though, it looks like we have a chance to break out of that rut, but just a chance. The cutting off of extended unemployment benefits will slow the economy, and may well result in a rebound in initial claims for unemployment insurance. However, for now the decline looks like a blessing to be thankful for. The question is, just how happy a New Year will it be for those thrown into abject poverty if all assistance ends and there are still no jobs to be found?
BIG LOTS INC (BIG): Free Stock Analysis Report
KROGER CO (KR): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis Report
Zacks Investment Research
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