Bad News On Jobless Claims

The Initial Claims for Unemployment Insurance report was decidedly weak, with claims rising to 475,000 from an upwardly revised 442,000 last week (was 440,000 pre-revision). Last week’s big drop now looks like an anomaly.

In just a little bit of a silver lining, the 4-week moving average did decline slightly, falling by 1,550 to 467,500. The weekly numbers can be very volatile, so in general it is better to watch the 4-week average to get a better sense of the trend.

As the chart below (from http://www.calculatedriskblog.com/) shows, the 4-week average had been in a very steep downtrend since it peaked in mid-April, but has reversed course over the last month or so (you might have to look closely to see it). There is a huge question of if we will see the sort of straight-down pattern that was typical following recessions prior to 1990, or if we will start to see the high plateau that happened following the last two downturns.

We probably have to get the 4-week average down below the 425,000 level — and preferably down near 400,000 — to have the data consistent with the economy on balance adding jobs rather than losing them. The small decline in the 4-week average this week is not going to get us there anytime soon, especially with this week’s number above the 4-week average, meaning that the 4-week average is probably more likely to rise than fall next week.

Continuing Claims

The news on the Continuing Claims front was not much better, with regular state-paid claims remaining unchanged at 4.563 million. While that figure is below where we stood a year ago (4.948 million), it does not come close to telling the whole story. Regular claims run out after 26 weeks. After that claims are paid for by the federal government, largely through funds from the ARRA, a.k.a. the Stimulus Act.

In January, over 40% of all the unemployed in this country had been looking for work for more than 26 weeks. The extended duration of unemployment in this downturn is not just a record — it is a chart-smashing, rewrite-the-record-books, previously-considered-unimaginable-type record. Extended claims are now at 6.004 million, or 31.6% higher than regular claims. That is an increase of 275,000 in the last week alone.

In the absence of the extended claims, there would be 6 million people (and their families) who would be without any income at all. By the time they have been unemployed for six months, they have probably already depleted most of their savings, especially considering how low savings rates were prior to the recession. They have probably also run up their credit card balances.

So just what would happen if those people had no income at all? For starters, those credit card bills would not get paid, and that would hardly be good news for banks like Capital One (COF: 37.33 +0.48 +1.30%) that hold the credit card receivables.

In times gone by, if they were homeowners, they could probably tap into the equity in their house to tide them over, but that option is not open if you are already underwater on your mortgage, or even just close to “sea level.” So they would probably stop paying their mortgage and wait for the sheriff to show up at the door. When the sheriff does show up, that would be one more foreclosure on the market, putting further downward pressure on housing prices.

In the meantime, it is reduced cash flow for the holders of the mortgages, and the related mortgage-backed securities, not exactly what a Fannie Mae (FNM: 1.02 -0.02 -1.92%) needs right now. Of course, with no income and no liquid assets, new spending is out of the question.

That would mean 6 million fewer customers for retailers of all stripes. While during the first six months of reduced income, they probably migrated from shopping at stores like Abercrombie & Fitch (ANF: 35.69 +0.31 +0.88%) to stores like Wal-Mart (WMT: 53.47 -0.59 -1.09%) with no income at all, even shopping at the Salvation Army would be a stretch.

The extended benefit program keeps the money circulating and in the process prevents further layoffs from occurring. In addition to the obvious humanitarian benefit, it is also highly effective as economic stimulus. However, it is far from an optimal solution, and we do not want to see extended benefits simply become welfare under another name, along with all the dependency issues that welfare can foster.

Even the extended benefits do not last forever, and by June an estimated 5 million people will have exhausted their benefits unless the extended claims are extended once again (see here). Thus, some of those dire consequences that we have avoided so far might still be on the horizon.