By Dirk van Dijk
Initial Claims for Unemployment Insurance rose by 26,000 last week to 397,000 (last week was revised up by 3,000, so one could see it as a 29,000 increase). This was a bit worse than the expected level of 382,000.
While the reversal after several weeks of sharp declines is not welcome, neither is it the end of the world. The weekly numbers, after an erratic few months, seem to have broken decisively to the downside. First the holidays and then the bad weather seemed to have played havoc with the weekly numbers, but those effects should have passed by now. Let us hope the decline resumes next week.
The good news is that we managed to remain below the 400,000 level. If we can stay below it, it probably signals the start of much more robust job growth. While we have had some big upward spikes in recent weeks, the overall downward trend in initial claims seems to be intact. We have gotten out of the “trading range” that initial claims were in for almost all of 2010.
Initial claims had been generally trending down since they hit a secondary peak of 504,000 (after revisions) on August 14, 2010. The weather would tend to have more to do with the timing of claims, not the overall level, making the week to week numbers more erratic, but not make much of a change in the overall level.
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 by 3,000 to 392,250.
As far as the domestic economy is concerned, robust job creation has been the last big part of the puzzle to fall into place. Whether it can withstand the pressures from government budget cuts and increased oil prices is an open question, but right now things are starting to look better on the jobs front. Relative to a year ago, the four-week average is down by 78,250 or 16.6%.
The economy is growing, but is only starting to add a significant number of jobs and to put a dent in the huge army of the unemployed. The February employment report was encouraging, but we still have a very long way to go. We added a total of 192,000 jobs according to the establishment survey, as the private sector total of 222,000 was significantly offset by the loss of 30,000 jobs in state and local government.
The unemployment rate dipped to 8.9% from 9.0%. While the monthly decline in the rate was probably due to rounding, it did indicate that the massive plunge in the prior two months was for real. The two month drop in the unemployment rate from November to January was the largest since 1958!
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).
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. However, 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.
Continuing Claims
The data on regular continuing claims was encouraging. Regular continuing claims for unemployment insurance fell by 20,000 to 3.771 million. They are down by 923,000 or 19.7% from a year ago. Regular claims are paid by the state governments, and run out after just 26 weeks.
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 February, 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, and from 21.8 weeks in January) and 43.9% 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 43.9% of the unemployed paints a very incomplete picture. The number of short-term unemployed (less than 5 weeks) was actually exceptionally low. With the exception of one month in 2007, it was at its lowest point since 1973.
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.
Downtrend Accelerating
The extended claims have started to trend down, and the downtrend is starting to pick up speed. They (the two largest programs combined) fell by 201,000 to 4.303 million. Relative to a year ago, they are down 1.192 million or 24.4%.
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) fell by 463,000 on the week and are down 2.647 million or 23.2% 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. Normally that is not a huge issue, but given the recent volatility it is more significant, especially for the weekly changes).
Extended Benefits & Tax Cuts
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.
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.
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, and is now projected to exceed the 2009 record deficit.
We will get data later today on the size of the Federal Budget deficit in February. The extended benefit portion of the deal was not the main reason the deficit is going up; the extension of the high-end Bush tax cuts -- and particularly the 2% payroll tax holiday -- played a bigger role.
The fiscal stimulus from the payroll tax cut is being undermined by attempted cuts in other domestic government spending. If the draconian House spending cuts of $61 billion for the latter half of fiscal 2011 were to be enacted, the result will be a slower economy and hundreds of thousands of fewer jobs in the economy. That, in turn, will significantly undermine the deficit reduction that is the supposed aim of the exercise. Many of the cuts, such as a $600 million cut for the IRS, do not seemed to be designed to reduce the budget deficit anyway, but to accomplish other objectives.
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.
The extension of benefits is one of the key reasons that initial claims are falling. While that may sound counter-intuitive, it is because extended benefits are a very effective form of economic stimulus.
Losing Benefits: The 99ers
It is worth noting that even with the deal there are large numbers of people who are losing 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 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 December there were 3.1 million Job openings, and that month we had 14.5 million people unemployed, so there are 4.67 people unemployed for each job opening. The January Jolts data should come out later today or tomorrow.
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?
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.
Still Some Murkiness
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.
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 very high unemployment duration numbers and the falling civilian participation rate (unchanged at 64.2% in February, but it has been trending down) from 64.3% in December, would suggest that it is the unhappy latter case that is happening.
Good News Inferred for Longer Term
The longer-term trend is very much in the right direction. The 4-week average staying below the 400,000 level is a very encouraging sign. In the last two recoveries, when it got below that threshold, that job creation really started to take off. If it stays there, we will climb the Stairway to Heaven of a rapidly falling unemployment rate. If it shoots above 500,000 then we are on the Highway to Hell.
The current level, provides a hope that we have escaped the purgatory of a pseudo recovery. I would like to see a few more weeks of continued improvement, or even stabilization at the current weekly level before declaring victory.
However, this report was a mixed one, with continued good news on the continuing and extended claims front (again with the caveat that we really don’t know what happened to the people who left the extended claims rolls) but a bit of a disappointment on the initial claims front. Still relative to where we were just a few months ago, even the initial claims number still looks pretty good.
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