New Unemployment Claims Fall: Hold Off on the Bubbly

By Dirk van Dijk

Initial claims for unemployment dropped by a much bigger than expected 52,000 in the last week to 565,000, the lowest level so far this year. This brought the four-week average down by 10,000 to 606,000.

Without a doubt this is good news, but before we break out the bubbly, remember that this was a holiday-shortened week. I would wait at least another week to see if this looks real.

Still, the four-week average is now a full quarter past its peak and 52,750 below it. Historically, peaks in the four week average have been associated with the official ends of recessions.

As the graph below shows (from Calculated Risk) we are both far enough past and far enough below the apparent peak that it looks unlikely that it is a false peak. Historically, false peaks have been rare (there were two small potential ones in the early 1980’s cycle, but much smaller and shorter than the current decline) so I think that it is unlikely at this point that we go on to make fresh highs. Now the big question will be: does the correlation between the peak in the series and the end of recessions continue to hold?

It also seems likely to me that the path on initial claims going forward will more closely resemble that of the last two recessions than earlier ones, remaining elevated but below the technical peak for a very extended time and falling only gradually, rather than a precipitous drop.

The news on continuing claims was not as good. Continuing claims rose to 6.883 million, an increase of 159,000 and a new record. Some confirmation in the continuing claims data would make me more confident in the initial claims "green shoot." So far we are not seeing it, and any recent declines in continuing claims have either been revised away or simply reversed and the old peak exceeded.

In absolute terms, the level of continuing claims just blows away any previous peak, like the mid 1970’s and the early 1980’s. The population and the workforce have both grown since then, so as a percentage of the covered workforce, we are actually slightly below the early 1980’s level (5.1% vs. 5.4%) and well below the mid-1970’s level (7.0%).

On the other hand, continuing claims are still rising, so it is possible that we will take out the early 1980’s peak, but it seems unlikely that we will get above the 7.0% level to set a new record.

So what does falling new claims and rising continuing claims say? To me it says that the duration on unemployment is going to continue to increase. Last month, the median time the unemployed were out of work increased by three full weeks in a single month. The pace of layoffs has slowed, but the pace of new hiring is still very low.

Half of all the people out of work have been looking for a new job for more than 17.9 weeks. Over 30% have exhausted their regular unemployment benefit (out of work more than 26 weeks) and are either on the extended benefits or are totally without income.

Unless they have investments (i.e. borrow against or drain the 401-K) or equity in their houses, they will have to fall back on credit cards to survive. When those get maxed out, well American Express (AXP), Capital One (COF) or J.P. Morgan (JPM) will just be out of luck since the people will default or file for bankruptcy.

As for the long term unemployed, their financial position is likely to be permanently damaged. Their retirements are likely to be significantly different than they had envisioned, and their kids' college plans may have to be altered. The effects of the Great Recession will echo for years to come.

Comments

[Mad Hedge F...:]

There’s another great Chart of the Day from Clusterstock showing that we have fallen back to 2000 levels of total employment. Only one out of 2.4 Americans now has a job. Stocks, real estate, and many other asset classes have also given up the decade’s gains. In the meantime, the US population has grown by 26 million to 307 million. Has the 21st century happen yet?

Jul 09 03:42 PM

[Neil459:]

On Jul 09 03:42 PM Mad Hedge Fund Trader wrote:
> There’s another great Chart of the Day from Clusterstock showing
> that we have fallen back to 2000 levels of total employment. Only
> one out of 2.4 Americans now has a job. Stocks, real estate, and
> many other asset classes have also given up the decade’s gains. In
> the meantime, the US population has grown by 26 million to 307 million.
> Has the 21st century happen yet?

And how many of those 1 of 2.4 are full time?

Jul 09 03:52 PM

[Poor Texan:]

Fewer people are now employed so it would be logical to assume that new claims would drop. We're getting to the 'core' employees; those that are necessary to keep the business alive. These will not be laid off but asked to work reduced hours (not so bad as long as the benefit packages, i.e. health insurance, are kept in effect). The reduced income will be seen in reduced discretionary spending putting more jobs at risk. And as for imports? I'm sure there are many dock and transportation workers who are on furlough due to reduced imports.

Jul 09 05:27 PM

[awake09:]

My employer has shrunk payroll by 30% since Feb 2009. Of those who were terminated, I don't know of any of them who have found anything full time. This is in L.A., CA, and things are rough here... even lawn care guys are going back south of the border. The SoCal entertainment industries have shrunk, and they aren't hiring those who get laid off. If that happens to me, I'll be moving back home, at 51! Whatever, huh?

Jul 09 05:45 PM

[whidbey:]

You did not mention that the average work week is 33 hrs, an 8% drop in take home pay from full employment. That is not counted publicly is it?

Those who have exhausted employment benefits are not on unemployment count. The real number, Total unemployment, is 16%, look at the pages in the back to see what is really happening.

What does it mean? Lies and damned lies are ruling the reporting. And by the way, it is not good news for a little turn up when you can not trust the score keepers to tell the truth.

Jul 09 05:47 PM

[Luke L:]

I think we are all missing the glaring difference between now and the recent past. Look at the divergence between the continuing claims and the initial claims. Are these 500k odd unemployed the new underclass who are unemployable? Is this saying the economy will not be able to generate sufficient employment to ever employee these people in jobs that will support their previous lifestyle? This is ugly stuff and the ramifications to the economy both long and short term is significant. Not withstanding the pain and suffering to these unemployed are they just going to be written off? Does the editor have any data of divergence of these two statistics going back further?

Jul 09 06:46 PM

[Moon Kil Woong:]

As unemployment payments extensions end this year (unless renewed again) the second number is sure to drop, but don't get all excited, it will mean another drop in the average joe's total income which is not good for the economy.

Apparently, after blowing hundreds of billions on banks, our legislators feel spending tens of billions on real people is somewhat of a waste.

In economic terms, with a cutback in total hours worked, real wages are not rising thus it's far from premature to say this recession is over. In fact, several seeking aplha posters claim that, in real terms, the unemployment picture is still eroding. Even with a decrease in the fall in unemplyment, with about 9.5% official unemployment and a 33 hour workweek, it is pure foolishness to think we will be in a healthy economy anytime soon.

The US's current scenario is sounding more and more like Japan and their experience with QE and mass government spending. If so, the economy will stabilize with massive unemplyment and will not improve because the government will have no $ for keynsian pump priming at the bottom, the country will be hobbled by tons of bad banks and companies dependent on government support, the political establishment will be filled with corrupt local pork legislators who can only be displaced by someone offering even more pork, and small businesses will be supressed by less efficient big government supported ones. If this already sounds like what we have today, please raise your hand.

We should never have allowed the Fed to embrace QE. Fully support Congressional audits and constraints on what the Fed can do. They clearly can't be trusted to behave themselves. A misbehaving Congress is bad enough for the US dollar and fiscal sanity without the Fed magically making Trillions more primary money without regards to its effect. It is QE that has doomed us, not just the federal deficit.

Jul 09 07:05 PM

[Yohei:]

My own random checking indicates the entire West Coast has horrible unemployment. Still reasonably OK here on the Wisconsin - Illinois border area but many other midwest areas are in bad shape and getting worse. Ohio and Michigan are as bad as anything on the West Coast.

Dunno, U-6 is 16.5%, but it looks to me, from my travels, to be higher. Maybe John Williams is correct and actual unemployment is about 21%. This is a national aggregate, of course, and for somewhere where unemployment is not as bad as this there is another somewhere where it is worse. The whole West Coast looks to me to have an unemployment rate of over 25%, more like 30%. Everything west of the 100th meridian is now visibly affected.

Going to be a lot of people on the dole, millions and millions of them. Maybe unemployment benefits will just be made permanent. In any case jobs are so hard to get that expecting welfare recipients to find work is irrational.

Jul 09 07:28 PM

[billddrummer:]

To Moon,

I see why you're in the top 10 in recommendations.

A terrific comment.

And to drygh

Why not find somewhere else to post, cetin?

Jul 09 08:47 PM

[mac123449:]

Unemployment numbers are definitely very fishy the ripples of GM going under is going to be very painful and long lasting People need to realize how much is linked to the automotive industry in the midwest not just a couple factories and parts suppliers but entire towns and cities that will soon see mass unemployment as everything in these towns is linked to that factory or foundry when they go under then the whole town goes under. Thats when the whores come in lol."Tommy Boy"

Jul 09 09:13 PM

[Arthur Hau:]

The red line is certainly very horrific.

The current continued unemployment claim figure is more than 40% higher than those in the 70's and in the 80's. What does that mean? The duration of unemployment is much longer than those of the last two recessions. Even when the new unemployment figure is about the same compared to the last two recessions, the recession could last for much longer.

Consumption cannot rise when you have prolonged unemployment. Unemployment checks will soon stop for those who are already unemployed. Eventually, they will drop out of the labor force forever. Low interest rates mean retirees can't earn enough interest to support their retirement. They too will lower their consumption.

Low interest rates can't boost investment because banks are tightening credits due to the bearish real estate market and high default rates. Corporations will continue on their globalization scheme to divest in the U.S. and invest in developing countries that have no pollution control, poor labor regulations, ...

The current one-sided free trade means that corporations can only engage in as much imports, but not so much in exports, activities as possible. Protectionism and manipulation of exchange rates (by lowering interest rates and buying up U.S. Treasury bonds) in developing countries will only draw more capital outflows from the U.S. that will result in even more unemployment.

Lowering tax rates can't encourage capital investment either cause manufacturers will continue to put their money in developing countries to cut costs in order to compete. Lowering tax rates can't help those who are already unemployed or those whose pay checks are shrinking. Lowering tax rates can't help the middle class professionals cause they are worrying about their job security and their retirement.

Protectionism is bad in general. However, protectionism can be used as a bargaining chip to force developing countries to eliminate their protectionism, to raise their environmental protection standards, to enforce their intellectual property laws, to improve their human right conditions, ....

Perhaps, the current global recession is creating the right moment for us to rethink about the entire concept of "globalization" and its economic, environmental, and political implications.

Jul 10 12:03 AM

[aja8888:]

" Low interest rates mean retirees can't earn enough interest to support their retirement. They too will lower their consumption."

Arthur: Take my word for it, that is already been going on.

Jul 10 12:13 AM

[cameroni:]

Thanks for the updated data Zacks. Lots of good info.
But try not to judge our current situation from modern history.

What we are experiencing now is unprecedented in the living memory or most people in this country. I really don't think charts from the most recent three or four recessions can imply anything about the future we are about to have.

As Poor Texan wisely pointed out, the pool of employed workers is now much smaller so new unemployment claims will logically be reduced. But not necessarily as a fraction of the remainder of those still employed. The big number losses may be behind us but the critical numbers are still ahead.

565 thousand lost jobs is stunning relative to all those still employed. I hope you are understanding my meaning because I am having difficulty with words making my point tonight. Don't get confused by numbers and charts on this issue.

We should be concerned with the percentages of the remaining workers losing work now and not minimize the impact of of the hundreds of thousands who file new claims each week by suggesting the worst is behind us. The worst is yet to come with students returning to school, tourism ending, construction slowing for winter etc. We are all collectively certain that this Christmas will be a bust as more people save, pay down bills and adjust to debts. So there won't be an uptick in fall spending or employment as in past years.

The peak theory has already lost meaning simply based on the huge numbers who remain jobless and are now welfare recipients or are eating into they're life savings to stay afloat.


On July 9th 2009 Dirk van Dijk wrote:

"Still, the four-week average is now a full quarter past its peak and 52,750 below it. Historically, peaks in the four week average have been associated with the official ends of recessions".

Jul 10 03:48 AM