Initial Claims for Unemployment Insurance rose by 2,000 last week to 439,000 (last week was also revised up by 2,000, so one could see it as a 4,000 increase). This was slightly better than the expected level of 442,000. While not as good as a further drop, it still keeps alive hopes that we might be able to 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.
The four-week moving average fell by 4,000 to 443,000. After declining sharply in the second half of 2009, the four-week moving average has been stuck in a tight trading range. We seem to be stuck in a pseudo-recovery, however, 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. 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 73,500 or 14.2%. The graph below charts the path of the four-week average since the start of the century. Clearly we are knocking on the door of breaking out of the trading range to the downside, but we have been here before and been turned back. That is, after all, what makes a trading range a trading range. So hold off on the champagne right now.
Continuing Claims
The data on regular continuing claims was positive. Regular continuing claims for unemployment insurance fell by 48,000 to 4.295 million. They are down by 1.331 million or 23.7% 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.
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.
After the 26 weeks are up, people move over to extended benefits, which are paid for by the Federal government. These benefits can increase the total amount of time people get benefits to up to 99 weeks (depending on the unemployment rate in your state).
The map below shows the maximum length of benefits by state. 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) rose by 121,000 this week to 4.933 million and are up by 735,000, or 17.5% 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 145,000 in the last week, and are down by 458,000 or 4.9% over the last year.
While 99 weeks is a fairly long time (just under two years), it is not forever. It is less than the amount of time since the failure of Lehman Brothers set off the financial meltdown, when we were already in a recession at that point but actually didn't officially know it. It was after the meltdown that businesses started to cut jobs at an unprecedented pace.
Many of those workers still have not found jobs, but they are now aging out of even the extended benefits. By this point, it is a pretty good bet that they have depleted their savings and run up all the debt they can in trying to make ends meet. Usually, unemployment benefits pay 60% of the income you got while working, but only up to a cap of $400 per weeks (I say usually because it varies somewhat from state to state). That works out to be just $20,800 per year, or less than the poverty line for a family of four.
The extended benefits are scheduled to end on 11/30, unless extended by Congress. That could result in a very rapid decline in the extended benefit rolls in early December, with as many as two million people losing their last source of income.
Unemployment Benefits Ought to Continue
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.
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 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. People can buy food at a Kroger's (KR) rather than having to rely on overstretched food banks, for instance.
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. 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.)
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.
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, they 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. 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 big fall in initial claims last week raises the hope that we were finally breaking out of the trading range to the down-side. However, it is far too early to declare victory. We seem 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 if 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, we seem to be just stuck in a rut.
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The four-week moving average fell by 4,000 to 443,000. After declining sharply in the second half of 2009, the four-week moving average has been stuck in a tight trading range. We seem to be stuck in a pseudo-recovery, however, 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. 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 73,500 or 14.2%. The graph below charts the path of the four-week average since the start of the century. Clearly we are knocking on the door of breaking out of the trading range to the downside, but we have been here before and been turned back. That is, after all, what makes a trading range a trading range. So hold off on the champagne right now.
Continuing Claims
The data on regular continuing claims was positive. Regular continuing claims for unemployment insurance fell by 48,000 to 4.295 million. They are down by 1.331 million or 23.7% 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.
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.
After the 26 weeks are up, people move over to extended benefits, which are paid for by the Federal government. These benefits can increase the total amount of time people get benefits to up to 99 weeks (depending on the unemployment rate in your state).
The map below shows the maximum length of benefits by state. 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) rose by 121,000 this week to 4.933 million and are up by 735,000, or 17.5% 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 145,000 in the last week, and are down by 458,000 or 4.9% over the last year.
While 99 weeks is a fairly long time (just under two years), it is not forever. It is less than the amount of time since the failure of Lehman Brothers set off the financial meltdown, when we were already in a recession at that point but actually didn't officially know it. It was after the meltdown that businesses started to cut jobs at an unprecedented pace.
Many of those workers still have not found jobs, but they are now aging out of even the extended benefits. By this point, it is a pretty good bet that they have depleted their savings and run up all the debt they can in trying to make ends meet. Usually, unemployment benefits pay 60% of the income you got while working, but only up to a cap of $400 per weeks (I say usually because it varies somewhat from state to state). That works out to be just $20,800 per year, or less than the poverty line for a family of four.
The extended benefits are scheduled to end on 11/30, unless extended by Congress. That could result in a very rapid decline in the extended benefit rolls in early December, with as many as two million people losing their last source of income.
Unemployment Benefits Ought to Continue
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.
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 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. People can buy food at a Kroger's (KR) rather than having to rely on overstretched food banks, for instance.
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. 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.)
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.
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, they 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. 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 big fall in initial claims last week raises the hope that we were finally breaking out of the trading range to the down-side. However, it is far too early to declare victory. We seem 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 if 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, we seem to be just stuck in a rut.
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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