Initial And Continuing Claims Fall

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Initial And Continuing Claims Fall

By Zacks Investment Research on October 28, 2010 | More Posts By Zacks Investment Research | Author's Website
Subscribe by RSSEmail/Share Page Buzz Initial Claims for Unemployment Insurance fell by 21,000 last week to 435,000, the lowest level since July. The four-week moving average of new claims dropped by 5,500 to 453,250, also the lowest level since July.
After peaking in the spring of 2009, claims fell rapidly until the end of the year. In 2010 they have been trapped in a tight “trading range” as is shown in the graph below (from http://www.calculatedriskblog.com/).

With this week’s numbers, we are knocking on the door of breaking out of the “trading range” to the downside. If so, that would be very good news. If the four-week average can get down below the 400,000 level is would probably indicate that the economy is adding enough jobs to actually make a significant dent in the vast army of the unemployed.

Then again, we have been here before, so let’s hold off on the champagne until it actually happens. Relative to a year ago, the four-week average is down by 75,500 or 14.3%.




Continuing Claims

The news on Continuing Claims was also encouraging, with regular continuing claims dropping by 122,000 on the week to 4.356 million. Relative to a year ago, regular claims are down by 1.447 million or 24.9%.

However, regular claims are the ones that are paid out of the state unemployment insurance funds, and tell a very incomplete story. They run out after 26 weeks, and one of the most notable aspects of the Great Recession relative to previous downturns is the extraordinary length of time people tend to be out of work after they have lost their jobs.

In large part that is because the core employment problem in the country has not been an excessive number of layoffs, which have actually been running below the historical average pace over the last year, but rather a very low rate of new job creation. The employment report that is due out next Friday will show the net number of jobs created or lost in October, but does not touch on how we got to that number.

In any economy, great or lousy, the number of new jobs created and lost is far larger than the net number reported in the big employment report. To get that underlying detail one has to look at the JOLTS report, which comes out the following week and will provide the data for September.

After the 26 weeks of initial jobless claims are up, people move over to extended unemployment benefits, which are paid for by the Federal government and which are an important part of the economic stimulus package. The news on extended claims is also good, at least apparently good, as the number of people getting extended benefits dropped by 414,000 in the last week to 4.658 million. However, relative to a year ago the number is up by 680,000 or 17.1%.

A decline of 414,000 in a single week looks to be very impressive. However, what is not known is why the number dropped. If it is because all those people found new jobs, that is great news. That is far from certain, and not even particularly likely.

Even extended claims don’t last forever. In some states with high unemployment rates, they can last up to 99 weeks, or almost two years. Two years ago was when the economy was in an absolute free-fall following the collapse of Lehman Brothers.

Many Aging Out of the System

It is thus highly likely that what we are seeing is a huge number of people who have “aged out of the system.” Like kids who age out of the foster care system, they are pretty well screwed. By this time, it is a pretty fair bet that they have exhausted their savings and borrowed all that they can.

While it varies a bit by state, as a general rule unemployment benefits provide 60% of what people were earning while they were employed, up to a cap of $400 per week. That $400 per week works out to be $20,800 a year, which is just below the poverty line for a family of four. Remember, that is the maximum benefit, so for most people it is less than that.

The people who get the maximum benefit are the ones who were earnings substantially more when they had jobs, and thus were probably locked into more expensive lifestyles that are hard to change in a short time (i.e. a mortgage or the lease on the apartment).

As they age out of the system, they will have no income, and they have probably already depleted their other financial resources. In other words, they will not be able to buy anything. That is a disaster for them, but it is also not good news for the economy. It is hard to see how hundreds of thousands or millions of people unable to buy food is a good thing for Kroger (KR: 22.04 -0.16 -0.72%) or Wal-Mart (WMT: 53.99 +0.12 +0.22%).

That lack of spending will tend to depress employment further, as the Krogers and Wal-Marts of the world see less business and thus become less inclined to hire. While we don’t want to turn extended unemployment insurance into a back-door welfare system, with all the dependency issues that entails, we should also not pretend that having millions of desperately poor people — poor to the point of serious hunger — is a good thing for the economy.

Overall, this is a better-than-expected report. The drop in initial claims is unambiguously good news. The drop in continuing and extended claims is much more ambiguous. Potentially it could be a sign that the economy is reviving, but it could also be a sign that millions of our fellow citizens are falling into desperate, third world-style poverty.

[horgad]

60 minutes had a good segment on the 99ers (those whose benefits have run out or are about to run out). There is going to be a bunch of them and I guess that they will transition to welfare, medicaid, and food stamps assuming that they qualify. But the numbers should start looking better.

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