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By Dirk van Dijk

Initial Claims for Unemployment Insurance rose by 12,000 in the last week to 500,000. This is bad news. The four-week average (see graph below from CalculatedRiskblog.com) rose by 8,000 to 482,500. That is more bad news.

After declining sharply in the second half of last year, initial jobless claims have been in a tight “trading range.” They are now breaking out to the upside, which is not at all what we need to see happening.

To really indicate that the economy is back on track, and is generating enough jobs to put a dent in the massive army of the unemployed, we need to see the four-week average fall below 400,000 and stay there. Now we are decisively moving in the wrong direction. Both the weekly number and the four-week moving average are at their highest levels since last November.

While we are still in better shape on initial claims that we were a year ago -- then, the four-week average was 567,250 -- that year-over-year advantage is deteriorating.

Continuing Claims

The news was just slightly better on the continuing jobless claims front, with a drop of 13,000 to 4.478 million. Continuing claims are 1.649 million or 26.9% below where they were a year ago. However, continuing claims only refer to regular state-paid unemployment claims, and those run out after 26 weeks.

In July, 6.572 million people, or 44.9% of all the unemployed had been out of work for more than 26 weeks. After that, they move on to extended jobless claims, which are paid by the federal government as part of the stimulus effort. Extended jobless claims jumped by 309,000 to 5.591 million. That puts them at 1.902 million, or 51.6% above a year ago.

In other words, the decline in regular continuing jobless claims was not due to people finding jobs, but simply timing out of the state jobless claims. Extended claims are also still seeing the effects of people who were thrown off the unemployment rolls due to the Senate filibuster finding their way back on to the benefit list. The extended claims numbers had fallen sharply in June due to the cut-off of benefits, and is now rebounding, rising by more than 1 million since the start of July.

Since continuing jobless claims ignore almost half of the unemployed, the best way to look at the data is the total of continuing and extended claims. The data for extended jobless claims is one week behind continuing claims, so technically it is not quite accurate, but it is close enough.

Continuing jobless claims are also one week behind the initial claims data. The total number of people getting unemployment benefits rose back above the 10 million mark to 10.069 million, an increase of 296,000 from last week and up 254,000 from a year ago.

The Reality of Unemployment Benefits

Unemployment benefits vary a bit by state, but generally they pay about 60% of a person’s pre-unemployment income, up to a maximum of about $400 a week, or $21,000 a year. That drop in income should be plenty of incentive for people to be seeking work, especially those who previously had better-paying jobs, where the percentage decline in income rises rapidly once the cap is hit. However, the lower-paid people probably had less savings to fall back on and less access to credit.

By the time people have been out of work for six months, it is highly likely that they have dug deep into their savings and run up their credit cards. Most people have expenses that cannot easily be cut in the short run, and most people don’t know how long they will be out of work. Given that the duration of unemployment in this downturn has far exceeded that of any previous recession (June’s median duration of 25.5 weeks was more than double the previous peak of 12.3 weeks set in December 1982), it is likely that most people have underestimated just how long they would be looking. It does not help that the savings rate prior to the recession was at a record low.

One of the reasons that extended benefits are a highly effective form of economic stimulus is that when people get their checks, the cash them and spend them almost immediately. The have to pay the mortgage or the rent, the electric bill and in this day and age, the bill for their Internet connection if they are going to have any hope of finding a new job. I suppose they could go to the library to log on…oh wait, libraries are closing around the country since state and local governments can’t afford to keep them open.

With their unemployment checks, they are able to go to Wal-Mart (NYSE:WMT) or Big Lots (NYSE:BIG) to buy groceries and, at this time of year, school supplies for their kids. If we assume that the average unemployment check is $300 per week, then if the number of people who fell off the rolls due to the filibuster was 1 million (it was more than that, but this makes the numbers easy to do), then it means that $1.2 billion a month less money per month was going into the economy. Since all of that money was money that was being spent immediately, it partially explains why consumer spending slowed down so much in July.

People back on the rolls will now have a little bit of money to spend on the basics of life, but that is no substitute for a real job. The longer someone is out of work, the less employable they become. Their skills deteriorate, and their contacts deteriorate just as fast.

Psychologically and emotionally, an unemployment check is not a real substitute. After all, it was Freud who pointed out that "happiness equals love plus work." There is nothing that the government can do about the love side of that equation. There are steps it could be taking on the work side, but there is not enough political will to do so.

Extended benefits are a band aid. Band aids are useful, in that they prevent infections, but they are not enough. One of the steps that would be most useful -- and which would seem to generate bi-partisan support -- would be to have a temporary (say, two years) reduction in the employer side of the payroll tax for employers that increase the size of their payrolls. Direct government employment like what was done in the 1930’s with the WPA would be another option, but one that would not generate much support on the GOP side of the aisle.

Sitting back and doing nothing while the stimulus fades is just dumb economics, and causes real pain to people who are already suffering. Putting idle resources to work -- and the almost 8 million more unemployed than we had before the recession started certainly count as idle resources -- does not crowd out private investment. It is only when the economy is strong and the government has to compete for labor and resources with the private sector that crowding out becomes a problem. It is a very real problem at some point, but that is not the case today.

Bad News

This report was bad news. The rise in initial jobless claims to the half million mark could well mean that the economy has started to lose jobs again in August, even ignoring the remaining census layoffs. Ironically, the only silver lining is the rise in the number of people getting extended benefits, simply because it means that those people will be able to spend a little bit of money, and that will help the economy. Not a whole lot, but at the margin it helps. It would be far better news if people were finding jobs and leaving the continuing and extended benefit rolls that way, but there is very little evidence of that happening.

Disclosure: None

Source: Half a Million Initial Jobless Claims: This Is Bad News