Initial Claims for Unemployment Insurance fell by 3,000 last week to 420,000 (last week was also revised up by 3,000, so one could see it as unchanged). This was better than the expected level of 425,000. The recent trend in claims has been downward, but the path has been erratic. It still looks like we might finally have gotten 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.
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 2,500 to 423,500. After declining sharply in the second half of 2009, the four-week moving average was stuck in a tight trading range for most of 2010. Now we seem to have broken clearly below the previous lows in the range.
This was the lowest level of the four-week average since August 2008 and the financial meltdown. We appear to be getting closer to the point where we have a real recovery -- one that actually produces enough jobs to bring down unemployment -- rather than the pseudo-recovery we have been in for the last year and a half.
If the current downward trend can be sustained, there is real hope. 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. The November employment report was clearly disappointing, but this report -- and the JOLTS report last week that showed a big increase in job openings in October -- indicate that hope still lives on the job front.
In hindsight, the run up to 500,000 initial jobless claims seems to be mostly a function of the Census workers being laid off. As that effect waned, we returned to the previous baseline. Relative to a year ago, the four-week moving average is down by 53,250 or 11.1%. 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 encouraging. Regular continuing claims for unemployment insurance fell by 103,000 to 4.064 million. They are down by 1.121 million or 21.6% from a year ago. Regular claims are paid by the state governments, and run out after just 26 weeks.
In November, half of all the unemployed had been out of work for 21.6 weeks (down from 25.5 weeks in June, but up from 21.2 weeks in October), and 41.9% 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 41.9% 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.
However, recently even the extended claims have started to trend down, but in an irregular fashion. This week they surprisingly moved the wrong way. The extended claims program ended at the end of November, preventing people from moving on to the next tier when their current tier of benefits runs out (the overall program has four tiers of additional weeks of benefits, and only people in the hardest hit states can get the full 99 weeks). This week they (the two largest programs combined) fell by 152,000 to 4.679 million and are down by 165,000, or 3.4% 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. Combined, regular claims and extended claims, plus a few much smaller programs, fell by 308,000 on the week and are down 1.296 million or 12.7% over the last year.
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.
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 all of them to “get a job” isn't going to work.
Cutting off extended benefits would likely cause initial claims to rise again. With the cut-off of benefits, and the extension not yet approved (although it will be retroactive when it does pass) one would have expected extended benefits numbers to plunge this week -- the big increase in expected claims looks strange, and is somewhat worrisome if it does not turn around in the next few weeks.
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 just about 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.
The tax and unemployment insurance deal should be stimulative to the economy, or at least prevents fiscal contraction from occurring. The temporary cut in the payroll tax is a net new stimulus and should help increase growth in 2011. 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?
Extended Benefits = Effective Stimulus
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 of those skills, and then be unavailable when those skills are needed again.
The people who get them tend to spend the money quickly on basic needs. This, in turn, keeps customers coming in the door at Wal-Mart (WMT) and Family Dollar (FDO). 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). These customers keep the people at those places -- 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.
Who Imports More, Rich or Poor?
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 frivolous things like Fiji water, imported from halfway around the world. But the poor will spend it more quickly, 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 an unemployed person 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 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 no 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 stabilized at 64.5% in November, but is still extremely low) would suggest that it is the unhappy latter case that is happening.
Encouraging Trend
The fall in the weekly initial claims number is a encouraging. We really need to see the four-week average fall below the 400,000 level and stay there if we are going to climb the Stairway to Heaven of a rapidly falling unemployment rate. If it shoots above 500,000 again, then we are on the Highway to Hell. We are still in the economic purgatory of a pseudo recovery, but perhaps -- just perhaps -- we have begun to break free. It looks like we have a chance, but just a chance.
The extension of unemployment benefits will have a stimulative effect on the economy, but it is mostly a continuation of the status quo, as is the extension of the Bush tax cuts for the wealthy. On both sides the deal was more the avoidance of fiscal contraction than net additional stimulus for the economy.
The temporary 2% cut in the payroll tax is, however, a new stimulative element in the package, and one that should be relatively effective. It only affects incomes up to $106,000, and for someone earnings $50,000 a year (roughly the median family income) it will mean an additional $1,000 in their pocket next year. That is more than the real median income has gone up pre-tax over a decade. That additional stimulus just might be enough to move us from pseudo-recovery to real recovery, but the operative word there is "might."
As a matter of accounting, I would have preferred that this stimulus come from the general revenues side of the government rather than raiding the Social Security trust fund. It seems likely that it will be used down the road as an argument for cutting Social Security benefits ("There is no trust fund, it's just a Ponzi scheme," etc.). On the other hand, it is one of the most stimulative ways around of cutting taxes on a bang-for-the-buck basis.
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Market News and Data brought to you by Benzinga APIsSince 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 2,500 to 423,500. After declining sharply in the second half of 2009, the four-week moving average was stuck in a tight trading range for most of 2010. Now we seem to have broken clearly below the previous lows in the range.
This was the lowest level of the four-week average since August 2008 and the financial meltdown. We appear to be getting closer to the point where we have a real recovery -- one that actually produces enough jobs to bring down unemployment -- rather than the pseudo-recovery we have been in for the last year and a half.
If the current downward trend can be sustained, there is real hope. 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. The November employment report was clearly disappointing, but this report -- and the JOLTS report last week that showed a big increase in job openings in October -- indicate that hope still lives on the job front.
In hindsight, the run up to 500,000 initial jobless claims seems to be mostly a function of the Census workers being laid off. As that effect waned, we returned to the previous baseline. Relative to a year ago, the four-week moving average is down by 53,250 or 11.1%. 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 encouraging. Regular continuing claims for unemployment insurance fell by 103,000 to 4.064 million. They are down by 1.121 million or 21.6% from a year ago. Regular claims are paid by the state governments, and run out after just 26 weeks.
In November, half of all the unemployed had been out of work for 21.6 weeks (down from 25.5 weeks in June, but up from 21.2 weeks in October), and 41.9% 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 41.9% 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.
However, recently even the extended claims have started to trend down, but in an irregular fashion. This week they surprisingly moved the wrong way. The extended claims program ended at the end of November, preventing people from moving on to the next tier when their current tier of benefits runs out (the overall program has four tiers of additional weeks of benefits, and only people in the hardest hit states can get the full 99 weeks). This week they (the two largest programs combined) fell by 152,000 to 4.679 million and are down by 165,000, or 3.4% 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. Combined, regular claims and extended claims, plus a few much smaller programs, fell by 308,000 on the week and are down 1.296 million or 12.7% over the last year.
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.
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 all of them to “get a job” isn't going to work.
Cutting off extended benefits would likely cause initial claims to rise again. With the cut-off of benefits, and the extension not yet approved (although it will be retroactive when it does pass) one would have expected extended benefits numbers to plunge this week -- the big increase in expected claims looks strange, and is somewhat worrisome if it does not turn around in the next few weeks.
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 just about 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.
The tax and unemployment insurance deal should be stimulative to the economy, or at least prevents fiscal contraction from occurring. The temporary cut in the payroll tax is a net new stimulus and should help increase growth in 2011. 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?
Extended Benefits = Effective Stimulus
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 of those skills, and then be unavailable when those skills are needed again.
The people who get them tend to spend the money quickly on basic needs. This, in turn, keeps customers coming in the door at Wal-Mart (WMT) and Family Dollar (FDO). 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). These customers keep the people at those places -- 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.
Who Imports More, Rich or Poor?
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 frivolous things like Fiji water, imported from halfway around the world. But the poor will spend it more quickly, 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 an unemployed person 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 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 no 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 stabilized at 64.5% in November, but is still extremely low) would suggest that it is the unhappy latter case that is happening.
Encouraging Trend
The fall in the weekly initial claims number is a encouraging. We really need to see the four-week average fall below the 400,000 level and stay there if we are going to climb the Stairway to Heaven of a rapidly falling unemployment rate. If it shoots above 500,000 again, then we are on the Highway to Hell. We are still in the economic purgatory of a pseudo recovery, but perhaps -- just perhaps -- we have begun to break free. It looks like we have a chance, but just a chance.
The extension of unemployment benefits will have a stimulative effect on the economy, but it is mostly a continuation of the status quo, as is the extension of the Bush tax cuts for the wealthy. On both sides the deal was more the avoidance of fiscal contraction than net additional stimulus for the economy.
The temporary 2% cut in the payroll tax is, however, a new stimulative element in the package, and one that should be relatively effective. It only affects incomes up to $106,000, and for someone earnings $50,000 a year (roughly the median family income) it will mean an additional $1,000 in their pocket next year. That is more than the real median income has gone up pre-tax over a decade. That additional stimulus just might be enough to move us from pseudo-recovery to real recovery, but the operative word there is "might."
As a matter of accounting, I would have preferred that this stimulus come from the general revenues side of the government rather than raiding the Social Security trust fund. It seems likely that it will be used down the road as an argument for cutting Social Security benefits ("There is no trust fund, it's just a Ponzi scheme," etc.). On the other hand, it is one of the most stimulative ways around of cutting taxes on a bang-for-the-buck basis.
FAMILY DOLLAR (FDO): 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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