Initial Claims for Unemployment Insurance fell by 24,000 last week to 398,000. This was much better than the expected level of 415,000. However, last week’s numbers were revised upwards by 4,000, so one could see it as a decrease of 20,000.
Recently, jobless claims have seemed stuck once again in a trading range above the 400,000 level, after a brief period lower than that earlier this year. The drop below 400,000 level is very good news, but comes after 15 straight weeks above it. Being below 400,000, as we were in February and March signaled the start of much more robust job growth, such as we saw in March and April. This could signal a return to the sort of job growth we saw then.
The climb back above the 400,000 telegraphed job weakness in May and June. While the April (+217K) job growth was a heck of a lot better than what we saw in May (+25K) or June (+18K), it was not really enough to make a serious dent in the vast army of the unemployed.
Track the 4-Week Average
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 8,500 to 413,750. Progress, but still above the psychologically important 400,000 level. As far as the domestic economy is concerned, robust job creation has been one of the last big parts of the puzzle to fall into place.
Now the big question is: can we stay below the 400,000 level? There are a lot of pressures slowing the economy, with a more concretionary fiscal policy at all levels of government at the top of the list. Still, this is the best economic data point we have gotten in a few weeks.
The economy is growing, and while job growth in the first six months of this year are almost double the job gains of the first half of 2010, it is not enough to put a dent in the huge army of the unemployed.
A Long Way to Go
The June employment report was deeply discouraging, and we still have a very long way to go. We added a total of just 18,000 jobs, according to the establishment survey. The private sector total of 57,000 was offset by the loss of 39,000 jobs in the public sector (mostly local government, but unlike in recent months also significant numbers at the Federal level, as well).
The unemployment rate rose to 9.2% from 9.1%, and from 8.8% in March. The consensus was looking for an increase of 110,000 private sector jobs, partially offset by the loss of 30,000 public sector, mostly local government jobs, for a net increase of 80,0000. The unemployment rate was expected to hold at 9.1%.
The civilian participation rate had been stuck at a very low 64.2% since January, and then it ticked down to 64.1%, so the increase in the unemployment rate was not from discouraged workers rejoining the labor force.
The first graph (from this source) shows the long-term history of the four week average of initial claims.
The Significance of the 400,000 Level
So why is the 400,000 level so significant? The next graph shows why. Historically that has been the inflection point where the economy starts to add a lot of jobs. It layers over the monthly gain or loss in private sector jobs (red line, right hand scale) and total jobs (blue line). Unfortunately, the automatic scaling did not put a line at zero for the job growth line, so you will have to eyeball it a bit.
Notice the strong inverse correlation between job growth and initial claims, and how when the blue initial claims number is below the 400,000 level that job growth is strong. OK, it is not that an increase from 399,000 to 400,000 is all that much difference than from 397,000 to 398,000 or from 402,000 to 403,000, but big round numbers are psychologically important, especially when that round number is near a historical inflection point.
Continuing Claims
The data on regular continuing claims was also somewhat encouraging this week. Regular continuing claims for unemployment insurance fell by 17,000 to 3.703 million. The overall trend is in the right direction. They are down by 829,000, or 18.3% from a year ago.
Regular claims are paid by the state governments, and run out after just 26 weeks (although several states have lowered the number of weeks they are going to pay in the future recently). The next 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.
It also shows how things at the regular state unemployment benefit level have been getting much better over the last year (but still well above the peaks of the last two recessions). Note that the insured unemployment rate generally follows the direction of the number of claims, but has been gradually diverging over time. That is a function of the overall growth of the labor force, and of tighter eligibility standards for getting unemployment insurance over time.
It also reflects the fact that this time around a very large proportion of those getting unemployment benefits are getting them from the extended Federal programs, not from the regular state programs.
In June, half of all the unemployed had been out of work for 22.5 weeks (down from a record high of 25.5 weeks in June 2010, but up from 22.0 weeks in May), and 44.4% 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 44.4% of the unemployed paints a very incomplete picture. The number of short-term unemployed (less than 5 weeks) was actually on the low side. The problem in terms of employment is not a lot of firing, but a lack of hiring. This has been the case for some time now.
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, given the extraordinary duration of unemployment, it is a safe bet that they are higher than in previous downturns. The duration of unemployment metrics are some of the key details to look at when the report comes out tomorrow.
Extended Claims Up Year Over Year
The extended claims had also been trending down, but in recent months that decline has flattened out. They (the two largest programs combined) rose by 62,000 to 3.760 million this week. That actually puts them slightly above the year-ago level of 3.711 million, the first year-over-year increase in over a year.
A much better measure is the total number of people getting benefits, regardless of which level of government pays for them. This is particularly true when looking at the longer term, not the week to week changes. Combined, regular claims and extended claims (including a few much smaller programs) rose by 320,000 to 7.646 million on the week, but are down 750,000 million or 8.9% over the last year.
(The extended claims numbers are not seasonally adjusted, while the initial and continuing claims are, so there is always 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.)
Even with the deal that extended unemployment benefits for this year in exchange for continuing the top end of the Bush tax cuts, 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. Extended benefits are in four different tiers, so if benefits had not been extended, some people would have lost their benefits after just 39 weeks of being out of work.
The key point, though is that the year long extension does not mean that some people will be getting benefits for a total of 151 weeks, as is sometimes thought. Unless there is a change, the extended benefits will end at the end of the year. Somehow I doubt that all of those 3.760 million people will have found jobs by then, as many employers are not even considering hiring people who have been out of work for more than six months, even if they have openings and the person is well qualified.
Getting Better, Still Awful
While the employment picture has improved from a year ago, in any absolute sense it is still just plain awful. The pace of improvement has stalled over the last two months. This week’s data is encouraging, but hardly game-changing.
The policies that are being debated in Washington DC right now are all things that would slow the economy, not speed it up. The one exception is the Federal Reserve, which is doing its part by keeping rates low and by using quantitative easing. While that helps a little bit, it is also much less effective than fiscal stimulus would be. Right now monetary policy is sort of “pushing on a string.”
In any case, QE2 ends today, and the likelihood of it being followed by QE3 is very low right now. However, based on the Fed minutes and Bernanke’s Congressional testimony, it is not totally out of the question.
Some claim that the long duration of unemployment benefits has actually discouraged people from looking for work. That is, 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 (well, as of the May JOLTS data) there are 4.67 people out of work for each job opening. Just telling all of them to “get a job” isn’t going to work.
Extended Benefits = Economic Stimulus
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! Without the unemployment benefit, people will have to either go on food stamps — although the House of Representatives is trying to reduce those — or will have to go to food banks, rather than Kroger’s (KR) to get their food.
As it is, 39.6 million people are on Food Stamps, or about one in seven, and that number is up 11.6% over the last year. If the extended benefits stop at the end of the year it is going to result in still more people out of work, in addition to the increased hardship for those who lose the benefits.
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.
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.
4-Week Average North of 400,000
The four week average staying above the 400,000 level is a discouraging, but not unexpected, sign. It will take more than one week just slightly below the key level to bring the average below it. In the last two recoveries, when it got below that threshold, that job creation really started to take off.
If it gets below the level and stays there, we will climb the Stairway to Heaven of a falling unemployment rate. If it shoots above 500,000 then we are on the Highway to Hell. The current level, if we stay here for a prolonged period of time, keeps us in the purgatory of a pseudo-recovery.
The trend over the last three months makes it clear that we are no longer on that Stairway to Heaven, but perhaps we are stumbling onto the first step. The decrease this week is encouraging.
This series can be volatile from week to week. Declining continuing and extended claims numbers are a good thing, but only if people are leaving the rolls for the “right reason." If they are leaving for the wrong reason — that the benefits have simply run out — the declines are not really good news (even if they do help reduce government spending); they are just a reflection of millions of people slipping into poverty. Hardly a thing to celebrate.
Despite the still-weak jobs picture, there is still no appetite in Washington to do anything about it. The focus continues to be on how big to make the job-killing budget cuts. The Fed had been marginally helpful with its first two rounds of quantitative easing, but now it has decided that it is just going to sit on the sidelines and watch for a few months.
While some of the headwinds facing the economy — such as the spike in oil prices earlier this year and the supply chain disruptions from Japan — are temporary and will fade soon, others are likely to last much longer. Chief among these are a fiscal policy that is turning very concretionary, precisely the wrong medicine for this economy.
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