US Unemployment Duration Stays Up

The big under-reported part of the unemployment situation is the increasing duration of unemployment. Being out of work for three weeks is very different than being out of work for 30 weeks. While over half the states and more than half the population does have extended unemployment benefits, it is a very scary prospect to not only be without a paycheck, but also having already exhausted your unemployment benefits. That means no income coming in, and given how low the savings rate has been over the past decade, likely no money period.

Economically it further depresses your spending, and psychologically it is just plain depressing. The average length of unemployment rose to 22.5 weeks in May from 21.4 weeks in April, and is up from 16.8 weeks a year ago. The median length of unemployment has also gone up sharply, reaching 14.9 weeks in May versus 12.5 weeks in April and 8.3 weeks a year ago. While the duration of unemployment always goes up during a recession, it has been particularly pronounced in this one (and the last expansion was noteworthy in how little it fell).

As can be seen in the graph below, on both measures the duration of unemployment far exceeds previous peaks. Also note that these measures normally continue to increase well past the end of the recession, which indicates to me that they are not about to stop rising any time soon.

We now have the unprecedented situation where the number of long-term unemployed (27 weeks or more) now outnumbers the short-term (less than five weeks) unemployed. Prior to last month this had never happened (well, the records were not kept during the Great Depression, but at least post-war it is unprecedented). The ratio of long-term to short-term rose to 1.21 from 1.10. That ratio has averaged 0.32 in the post-war period, and before this cycle the record was 0.78 hit in 1983.

A year ago, the ratio was an above average, but unexceptional 0.48. The number of short-term unemployed actually fell in May to 3.275 million from 3.346 million in April, and is virtually the same as a year ago (3.257 million). Short-term unemployed now represent just 22.4% of the unemployed versus 38.1% a year ago.

Long-term unemployment has skyrocketed. There are now 3.95 million Americans who have been out of work for more than half a year, up from 3.68 million in April and just 1.57 million a year ago. The next group down, those who have been out of work between 15 and 26 weeks, is also swelling rapidly - rising to 3.054 million in May from 2.531 million in April and just 1.238 million a year ago.

If the long-term unemployed are people with mortgages, it is hard for me to see how they will continue to pay them. This means there is still more pain in the pipeline for firms closely tied to the mortgage industry like Fannie Mae (FNM: 0.70 -0.03 -4.11%), Freddie Mac (FRE: 0.76 0.00 0.00%) and the mortgage insurers like MGIC (MTG: 5.05 +0.25 +5.21%). In the past, they might have been able to refinance their houses and tap the equity to have the cash to continue to pay the monthly mortgage bill (not a great long-term strategy, but it could tide you over). That option is now closed off as most people have very little equity left in their houses.

If people still have room on their credit card limits, they will tend to max out the cards, not on frivolous stuff, but just to keep the lights on. Once the cards are maxed out, the next step is bankruptcy. This is not welcome news for big card issuers like Capital One (COF: 24.11 -0.89 -3.56%). Expect bankruptcy filings to continue to soar.

However, even bankruptcy does not help people that much since so many of the big debts that people have are non dischargeable. Thanks to hefty campaign contributions to key Senators (of both parties - 13 Democrats went along with almost the whole GOP in caving to the banks), the terms of a mortgage on a primary residence cannot be changed even if you file (terms on the vacation house or the yacht can be changed, though). Student debt, taxes and child support payments also cannot be affected by the judge.

This recession has made almost all Americans (well, actually almost all people regardless of nationality given the worldwide nature of the downturn) poorer. However, it is long-term unemployment that tends to lead to destitution. Poverty is not a subject that comes up often when people talk about the market.

Since poor people don’t have money, they don’t count as far as the markets and the overall economy is concerned. After all, if the poorest 10% of the population were magically able to double their spending, it would hardly move the needle in terms of overall aggregate demand.

Where this increase in poverty is likely to show up is in the budgets of all levels of government. State and local governments are already under severe budgetary constraints, and California is teetering near the edge of bankruptcy. More desperately poor people are not going to help the situation. However, unless we want to see massive tent cities, and malnourishment bordering on starvation in this country, these people will either have to be taken care of by the government (Section 8 housing, food stamps, etc.) or they will have to find jobs.

Yes Friday’s jobs report was far better than I had expected; however, let us not lose sight of the fact that the economy is still losing jobs at a historically very high rate. The rate of layoffs has slowed, but the pace of new hiring has not picked up. It will be a long, long time before the number of jobs surpasses the last peak of 115.8 million private sector jobs we hit in November of 2007. Until then, there will be plenty of pain from sea to shining sea.