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More progress, albeit slow progress, is being made on the employment front. This week, initial claims for unemployment fell to 530,000, a drop of 21,000 (20,000 net of revisions) and the four-week moving average fell to 553,500, a decline of 11,000. Continuing claims also fell to 6.138 million, a decline of 123,000.

The decline in continuing claims overstates the case a bit, however, since they run out after 26 weeks (regular state unemployment claims). Job losses were running hot and heavy back in March. For most people, they then become eligible for extended claims, largely funded by Federal stimulus program money. Total extended claims (the 2 major programs combined) were 3.577 million, an increase of 32,000 on the week. Thus the total number of people getting unemployment benefits fell by 91,000 on the week.

Actually, the analysis is a bit more complicated than that, since regular continuing claims are released with a one-week delay, and extended claims have a two-week delay. However, if we ignore those timing issues, it still stacks up as good news.

On the other hand, even extended benefits do not last forever, and there is a very real possibility that large numbers of people are being left with no income at all. The House recently passed another extension of up to 13 weeks for people in states where the unemployment rate is over 8.5%, but it has yet to be taken up by the Senate. If it is not passed there, an estimated 1.4 million people are scheduled to run out of extended benefits by the end of the year.

The chart below shows that the four-week moving average is well off the peak (105,250 off the peak to be exact) that was set back in April. Historically, the peaking of initial claims for unemployment insurance has been a very good indicator that a recession is over.

Both the size of the decline and the time since the peak argue that this was indeed the real peak, and we are unlikely to surpass it in this cycle. There is, however, a real danger that this cycle is more like that of the last two downturns, when initial claims first fell as the recession officially ended, but then found an extended plateau at very high levels. That did not occur in earlier recessions.

The current levels of new claims are much better than in the spring, but still not good enough. We probably need to get down below the 400,000 level to indicate that on-balance the economy is creating more jobs than it is losing. Still, we are much closer to that level than we were a few months ago.

One of the problems this economy has faced even before the current (well, hopefully former) recession started was a slowdown in the pace of new job creation. In good times and bad, the economy is both adding and losing jobs -- it is the net difference between the two that we see as the change in payrolls and in the unemployment rate.

During most of the Clinton boom, when the economy was on average adding over 2.2 million jobs a year, the rate of initial unemployment claims was well over 300,000. Back then, though, people could quickly find a new job and the rate of long-term unemployment (over 26 weeks) was extremely low. Now a record share of the unemployed have been out of work for more than six months. The ratio of people out of work for more than 26 weeks to those just laid off was 1.65 in August. Before this downturn, never before had that ratio exceeded 0.80.

Before those people were laid off, they might have been middle class, but they are not anymore, and the odds are against them returning there. In all likelihood, when they do get a new job, it will be at a substantially lower salary than their previous job. In the meantime they have probably run up their credit cards and wiped out their savings.

If they don’t find a new job, then they will go bankrupt, and the big credit card companies like American Express (NYSE:AXP) and Capital One (NYSE:COF) will have to take write downs. Wednesday, we learned that Moody’s (NYSE:MCO) credit card charge off index soared to 11.49% from 10.52% in July, an increase of almost a full percent in just a month.

The slowdown in the damage done is a good thing. Let’s not forget, though, that the damage is still being done. The economy is getting better, but it is going to be a very painful aftermath.

The stimulus package and the very aggressive actions by the Fed have greatly helped the situation, at least compared to where we would have been without those actions. Just imagine the plight of those people who are currently on extended benefits if those benefits had not been there. Imagine the effect that would have had on retail sales and on mortgage delinquencies. However, for millions and millions of people, it has not been enough.

Source: Initial Unemployment Claims Drop Again