Initial Jobless Claims Fall Sharply - Analyst Blog

Initial Claims for Unemployment Insurance fell by 37,000 last week to 404,000 (last week was also revised down by 4,000, so one could see it as a 41,000 decline). This was much better than the expected level of 425,000.

This is a welcome turnaround, and suggests that the decline we saw at the end of last year was for real. This is a series that tends to be a bit on the flakey side around the holidays. We had a big drop during the Christmas week to 388,000, and then big increases over the last two weeks, and now another big decline.

The overall direction of initial claims still seems to be downward. It looks like we have gotten out of the “trading range” that initial claims have been in for the last year. Initial claims had 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 fell by 4,000 to 411,750. It appears that we are 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.

Hope Returns

There is a real hope that the downward trend has been re-established with this week's data, but the numbers over the next few weeks will have to be good to make sure. 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 December employment report was a bit disappointing, especially after the ADP report showed an increase of 297,000 private sector jobs. Instead the total was just 103,000 jobs, with 113,000 from the private sector. There was a big drop in the unemployment rate, but that was partly a function of a declining participation rate.

The direction of initial claims over the next few weeks as we get out of the holiday season will be very interesting to watch. In hindsight, the run up to 500,000 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 55,500, or 11.9%. The graph below charts the path of the four-week average.

Note that in the previous two cycles, there was a long high plateau of initial claims after the recession officially ended, in contrast with previous cycles where initial claims fell almost without pause once the economy started to recover. This cycle the recovery seems to be happening faster than in the previous two, but not as fast as in the downturns prior to those. The previous two recessions were relatively mild affairs compared to the Great Recession, or the Reagan Recession.

Continuing Claims

The data on regular continuing claims was encouraging. Regular continuing claims for unemployment insurance fell by 26,000 to 3.861 million. They are down by 1.034 million  or 21.1% from a year ago.

Regular claims are paid by the state governments, and run out after just 26 weeks. The second graph shows the long-term history of continuing claims for unemployment, as well as the percentage of the covered workforce that is receiving regular state benefits. It does a good job of showing just how nasty that the Great Recession was for the job market. But also how things at the regular state unemployment benefit level have been getting much better over the last year (though still well above the peaks of the last two recessions).

However, in December, half of all the unemployed had been out of work for 22.4 weeks (down from 25.5 weeks in June, but up from 21.7 weeks in November), and 44.3% 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 44.3% 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. Unfortunately, the data on extended claims in prior recessions is not available at the St. Louis Fed database.

However, recently even the extended claims have started to trend down, but in an irregular fashion. This week, though, was a disappointment. They (the two largest programs combined) rose by 29,000 to 4.677 million. Relative to a year ago they are down 979,000 or 17.3%.

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 (including a few much smaller programs) rose by 401,000 on the week but are down 2.235 million or 18.9% over the last year. (The extended claims numbers are not seasonally adjusted, while the initial and continuing claims are, so there is a little bit of apples-to-oranges. In addition, the continuing claims data are a week behind the initial claims, and extended claims are a week behind the extended claims data).

Tax Cuts & Unemployment Insurance

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.

The tax deal prevented 2 million people from losing this last financial lifeline. The downside to the deal was that it will reverse the downward trend in the budget deficit and cause the deficit to be higher in fiscal 2011 than it was in fiscal 2010, possibly exceeding the 2009 record deficit.

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 almost five people out of work for each job opening. The extension of benefits is one of the key reasons that initial claims are falling. The fact that extended claims have not increased significantly in the wake of the extension is very good news.

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 JOLTS report showed that in November there were still 4.6 people unemployed for each job opening.

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? Of course not!

There is a concern 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. 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 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 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 Wal-Mart, Family Dollar 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.

Who Imports More - Rich or Poor?

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 (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-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 who 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 graph below (from http://www.cbpp.org/). Presumably the number will be just as large for 2010 as it was for 2009.

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 to 64.3% in December from 64.5% in November, which accounted for more than half of the drop in the unemployment rate from 9.8% to 9.4%) would suggest that it is the unhappy latter case that is happening.

In the Right Direction

It now looks like the increase in claims over the last two weeks was a seasonal fluke, and the trend is very much in the right direction. The four-week average is at its lowest level in over two years. These numbers are still being affected by the holidays, so the numbers will have to be watched closely over the next few weeks.

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 the hHeaven of a rapidly falling unemployment rate. If it shoots above 500,000 then we are on the Highway to Hell. Right now though, it looks like we have a good chance to break out of that rut, but just a chance.

 
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