Initial Claims for Unemployment Insurance rose by 5,000 last week to 417,000. This was worse than the expected level of 400,000. Worse, last week’s numbers were revised upwards by 4,000, so one could see it as a increase of 9,000.
Recently, initial jobless claims seem stuck once again in a trading range above the 400,000 level, after a brief period lower than that earlier this year. The drop two weeks ago below 400,000 level was very good news after 17th straight weeks above it. Alas, that was not destined to last.
This is the second straight week of claims going in the wrong direction. There was, however, a special factor in the last two weeks: the Verizon (VZ) strike — now on hiatus while talks continue — added at least 12,500 initial claims to last week, and 8,500 to this week.
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. We seem to be flattening out around the 400,000 level, (adjusted for the VZ strike) which is not great, but it is an improvement over the 425,000 or so level we were in for most of those 17 weeks. 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 (+53K after revisions) or June (+46K), it was not really enough to make a serious dent in the vast army of the unemployed, and we saw the unemployment rate rise in both months. July was a bit better, with 117,000 jobs added.
The current level would tend to imply a slight drop in the unemployment rate, perhaps to 9.0% from the current 9.1%. The drop in July to 9.1% was a bit of an illusion, as it was mostly due to a drop in the percentage of people looking for work. The percentage of the population actually working fell to its lowest level since 1983.
Track the 4-Week Moving 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 rose 4,000 to 407,500, 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 get below the 400,000 level and stay there? 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. The rise away from that level over the last two weeks is disappointing, but not a cause for despair.
The economy is growing, and while job growth in the first seven months of this year is 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. The July employment report was better than expected, and not a repeat of the back-to-back disasters that were May and June. It was however, in absolute terms, at best a mediocre report.
We still have a very long way to go. We added a total of 117,000 jobs according to the establishment survey. The private sector total of 154,000 was offset by the loss of 37,000 jobs in the public sector (mostly State and Local government).
Both Unemployment and Employment Rates Fall
The unemployment rate fell to 9.1% from 9.2%, but the employment rate, or the percentage of the population over age 16 actually working fell to 58.1% from 58.2% in June and 58.4% in May. The consensus was looking for an increase of 100,000 private sector jobs, partially offset by the loss of 22,000 public sector, mostly local government jobs, for a net increase of 78,000.
We get the August employment report next Friday, and I expect that it will look a lot like the July report, with about a total of 115,000 jobs added, composed of about 155,000 on the private side, offset by a about 40,000 pink slips in Government jobs.
The first graph (from this source) shows the long-term history of the four week average of initial claims.
Significance of 400K 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, so it’s 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 more encouraging this week. Regular continuing claims for unemployment insurance fell by 80,000 to 3.641 million. The overall trend is in the right direction. They are down by 820,000 or 18.4% from a year ago.
Regular claims are paid by state governments, and run out after just 26 weeks. (Several states have lowered the number of weeks they are going to pay in the future. They have also been tightening up the eligibility standards.)
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 July, half of all the unemployed had been out of work for 21.2 weeks (down from a record high of 25.5 weeks in June 2010, and from 22.5 weeks in June 2011), 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 (fewer 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 Down, but Flattening
The extended claims had also been trending down, but in recent months that decline has flattened out. They (the two largest programs combined) fell by 20,000 to 3.638 million this week.
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) fell by 46,000 to 7.290 million on the week and are down 2.867 million or 28.2% 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 39 weeks of being out of work. Unless there is a change (extremely unlikely given the recent budget deal), the extended benefits will end at the end of the year.
Somehow I doubt that all of those 3.638 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. What we are looking at is a massive increase in poverty coming at us next year.
Improving, but Still Awful
While the employment picture has improved from a year ago, in any absolute sense it is still just plain awful. I find it astounding that aside from making political points, nobody in Washington seems to care anymore. The policies that are being enacted are all things that would slow the economy, not speed it up. Fortunately, very few of the spending cuts in the first round of cuts in the deal will happen in 2011, and we get only a little bit in 2012.
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 is over with, and the likelihood of it being followed by QE3 is low right now, although the weak data and market of the last month or so have been raising the odds.
Tomorrow’s speech by Bernanke in Jackson Hole might give us some clues as to what the Fed will do next, but I would caution people from expecting too much. The “promise” that the Fed made to keep the Fed Funds rate at the current 0-0.25% range until the middle of 2013 is causing the private sector to do a bit of quantitative easing on its own. On of the principal aims of QE is to lower mid- to long-term interest rates, and they sure have come down a lot of late.
One thing the Fed could do, and Bernanke might endorse is ending the policy of paying banks 0.25% on their excess reserves. Ending that policy is long overdue, particularly when 0.25% is more than the rate on the two-year T-note. In effect, the Fed is paying banks not to lend. That might be a useful thing to do if the Fed were trying to drain the money supply and slow down an overheated economy, but it seems counter to their basic objectives at this time.
A Fed Divided
The Fed seems very divided right now. Based on the Fed minutes and Bernanke’s Congressional testimony, it is not totally out of the question, and the recent data has to be pushing the Fed in the direction of doing something more. However, there were three dissenters in the last policy statement, who objected to even the very mild step of making the “extended period” language more explicit to mean until mid-2013. They want the Fed to have the flexibility to raise rates much sooner than that. Personally, I think the dissenters are nuts.
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. Now think about doing so for over a year.
Right now (well, as of the June JOLTS data) there are 4.48 people out of work for each job opening. Just telling all of them to “get a job” isn’t going to work. As you can see from the continuing claims chart above, the government has actually been much less generous in this recession than it has in recessions passed — that is why the insured unemployment rate is so low given the actual level of claims.
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. The majority of people get benefits that are substantially lower than that. You think any of those people have been able to sock any of that away?
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. Come January, there will be 3.638 million more people who are not even getting that below-poverty-level income unless benefits are extended again.
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. It might have some of that effect at the very low end of the job market — people earning around minimum wage — but not for the vast majority of jobs out there. 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 Costco (COST) 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.
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 Costco, Big Lots and Safeway (SWY) — 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.
Discouraging, Not Unexpected
The four-week average staying above the 400,000 level is a discouraging, but not unexpected, sign. We are getting closer to it, and it is possible we could fall below it next week. In the last two recoveries, when it got below that threshold, that job creation really started to take off.
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. President Obama is planning a speech after Labor Day which will contain some new proposals, but it is unlikely that many of his proposals can get through Congress at this point. 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 (especially at the State and Local level), precisely the wrong medicine for this economy.
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