Bad news on the Initial Claims for Unemployment Insurance front. Last week initial claims rose for the third week in a row, rising 8,000 to 480,000.
In addition, last week's numbers were revised up by 2,000. The 4-week moving average of claims, which given the inherent volatility of the weekly numbers is generally considered a better measure, rose by 11,750 to 468,750.
It looks as if what I have long feared might be occurring. As the graph below shows, after both of the last recessions, we started to plateau after an initial period of sharply decreasing jobless claims. Until this point, the decline in initial claims had more closely resembled what happened coming out of the recessions of the 1970’s and early 1980’s.
The plateaus following the last two recessions coincided with a long period of jobless recovery. If this were to happen again, it would be very bad news.
That said, we have made significant progress on bringing initial claims down so far. A year ago, initial claims were at 624,000 and rising fast.
Continuing Claims
The news was not very good on the continuing claims front, either. As far as regular unemployment claims are concerned, they edged up by 2,000 to 4.602 million. On a 4.6 million base, a change of 2,000 is pretty much of a rounding error.
However, the regular state insurance fund paid claims run out after 26 weeks. In December, almost 40% of all the unemployed had been out of work for longer than that, and half had been out of work for more than 20.5 weeks. Clearly a measure of unemployment that only deals with 60% of the unemployed is a seriously flawed measure.
After the 26 weeks is up, people move over to extended claims, which are largely funded as part of the ARRA (Stimulus Act). Combining the two largest programs, they now stand at 5.855 million, or more than 1.2 million higher than regular claims. They also increased by 242,000 in the last week (actually 2 weeks ago, but data released today). The number to focus on is not the continuing claims number of 4.601 million -- it is the 10.457 million total getting unemployment benefits.
Looking Ahead to the BLS Report
One of the details of Friday’s unemployment report that I will be most interested in are the duration of unemployment numbers. The very long period of time that people spend looking for a job after they become unemployed is one of the most striking features of this Great Recession, relative to previous recessions.
The two most common measures of this are the mean (average) and median durations of unemployment, the histories of which are shown in the second graph below. The median is probably a better measure, but only goes back to 1967, while the mean data goes back to 1948. Regardless of measure, we are not just at a record level -- we have absolutely smashed any previous record.
Long-term unemployment is a very different experience, and has very different implications than short-term unemployment. If you are laid off for a few weeks, and are confident that you will be called back soon, then unemployment is like an unplanned vacation. Yes, regular unemployment benefits don’t provide as much as your regular paycheck, but it is not going to seriously hurt you financially and you will have the ability to bounce back fairly quickly after going back to work.
However, if you are out of work for months on end, your savings will be depleted and you will have probably maxed out your credit cards. If simultaneously you are underwater on your mortgage, or even close to the waterline, you will not be able to tap your home equity to pay your ongoing expenses. In previous downturns, that had always been an option for homeowners.
If the person had been a member of the middle class when he was working, there is a high probability that he will not be after eight or nine months of being unemployed, and it will be difficult if not impossible to return to their previous standard of living. Also, the longer you are out of work, the more likely that the next job you get will be at a lower salary than you were making before you lost your job.
Skills deteriorate if they are not exercised regularly. The contacts on your rolodex grow stale. There is also a huge psychological cost to being out of work for an extended period of time.
Extended Benefits Have Been Necessary
The extended benefits help at least partially cushion the blow and allow for at least the possibility of return. In their absence, 5.855 million Americans (and their families) would be left with no income at all.
Most of the working and middle class had very little in the way of savings going into this recession as a result of a prolonged period of an extraordinarily low savings rate. What savings they had were mostly in 401(k)s and IRAs. So if they tap them, they not only have to pay income taxes on what they take out, they have to pay a 10% penalty. If they are in their 50’s, they will have very little chance to replenish them before they retire.
If they are underwater on their house, probably the best thing they could do is simply stop paying the mortgage and wait for the sheriff to show up at the door. In many areas people have been able to stay in their houses for over a year after they stopped paying since the banks really don’t want to deal with any more foreclosures than they have to.
In the absence of the extended benefit claims program, the mortgage/housing/foreclosure/banking problems would be far worse. Thus it is possible to think of the extended benefit program as one more part of the support program for the housing market and the banking industry.
Yes, the program helps the unemployed, but it also indirectly helps Bank of America (BAC) since at the margin more people are continuing to pay on their mortgages. It helps Kroger’s (KR) since more people are able to get their groceries there instead of at the local food bank (when are we going to have a food bank bailout, by the way?).
...But Extended Benefits Must Go Away
Longer term, though, we do not want to see extended benefits become a long-term welfare program. Extended benefits help financially but not psychologically. If they go on too long they have the potential of spawning dependence the way the old welfare programs did.
Think of extended benefits as an analgesic that helps reduce pain. Taking an Advil when you are sick is useful and helps you feel better, but it does not cure you. Only real job growth will really cure the sick U.S. economy.
It would be very dangerous for Dr. Bernanke to cut off the IV of cheap money while the patient is still so sick.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.
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