Jobless Claims Up First Time in 5 Weeks

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Includes: BIG, KR, SPY, WMT
by: Zacks Investment Research

By Dirk van Dijk

Initial Claims for Unemployment Insurance climbed by 12,000 last week to 465,000. That is the first increase in five weeks.

Since claims can be volatile from week to week, it is better to track the four-week moving average to get a better sense of the trend. It declined by 3,250 to 463,250. After declining sharply in the second half of 2009, the four-week moving average has been stuck in a tight trading range.

Just over a month ago, the weekly number hit 500,000 and threatened to break out to the upside from the range, but the decline over the last month brought us down to 450,000 (before being revised up to 453,000), which brought hopes that we might be breaking out to the downside.

This week's numbers seem to indicate that neither the hope -- nor the fear -- was justified. We seem to be stuck in a pseudo-recovery. The economy is growing, but not at the sort of rate needed to add a significant number of jobs and to put a dent in the huge army of the unemployed.

In hindsight, the run-up to 500,000 seems to be mostly a function of the Census workers being laid off (they are almost all gone now, and the Census was completed quicker, and at less cost than anyone had expected). As that effect waned, we returned to the previous baseline. Relative to a year ago, the four-week moving average is down by 89,000 or 16.1%. The graph below charts the path of the four week average since the start of the century.

Continuing Claims

The data on continuing claims was mixed. Regular continuing claims for unemployment insurance fell by 48,000 to 4.489 million. They are down by 1.578 million or 26.0% from a year ago. However, regular claims are paid by state governments, and run out after just 26 weeks.

In August, half of all the unemployed had been out of work for 19.9 weeks, and 42.0% had been out of work for more than 26 weeks. Clearly a measure of unemployment that by definition excludes 42.0% of the unemployed paints a very incomplete picture.

After the 26 weeks are up, people move over to extended benefits, which are paid for by the federal government. These benefits can increase the total amount of time people get benefits up to 99 weeks (depending on the unemployment rate in your state).

While regular claims are down, it is mostly from people aging out of the regular benefits and “graduating” to extended benefits. Those rose by 208,000 this week to 5.172 million and are up by 1.316 million, or 34.1% over the past year.

Total Number of Claims

A much better measure is the total number of people getting benefits, regardless of which level of government pays for them. On that basis, then, claims rose by 160,000 in the last week, but are down by 262,000 or 2.6% over the last year.

While 99 weeks is a fairly long time -- just under two years -- it is not forever. It is less than the amount of time since the failure of Lehman Brothers (OTC:LEHMQ) set off the financial meltdown. While we were already in a recession at that point (but actually didn’t officially know it, just as we just recently learned officially that the recession ended in June 2009), it was after the meltdown that businesses started to cut jobs at an unprecedented pace.

Many of those people still have not found jobs, but they are now aging out of even the extended benefits. By this point, it is a pretty good bet that they have depleted their savings and run up all the debt they can in trying to make ends meet. Usually, unemployment benefits pay 60% of the income you got while working, but only up to a cap of $400 per weeks (I say usually because it varies some what from state to state). That works out to be just $20,800 per year, or beneath than the poverty line for a family of four.

Unemployment Benefits = Effective Stimulus

The vast majority of economists agree that extended unemployment benefits are among the most effective forms of economic stimulus. The people who get them tend to spend the money quickly on basic needs. This, in turn, keeps customers coming in the door at Wal-Mart (WMT) and Big Lots (BIG).

It means that, at the margin, some people are able to continue to pay their mortgages and thus helps keep the foreclosure crisis from getting even worse than it already is. People can buy food at Kroger’s (KR) rather than having to rely on overstretched food banks. However, by the time they are well into extended benefits, they might also be spending food stamps as well as the unemployment check at Kroger’s.

These customers keep the people at Wal-Mart, Big Lots and Kroger’s -- and, of course, their competitors, employed. It also keeps the people who make and transport those goods employed as well, although in that case much of the stimulus is lost overseas if the goods are imported.

However, it is not clear if the marginal propensity to import is higher for poor (or temporarily poor because they are unemployed) or for the rich. Lots of the stuff on the shelves of Wal-Mart comes from China. On the other hand, the poor are not likely to be buying Swiss watches or German autos.

What is clear is that they will spend it quicker, increasing the velocity of money, than will the rich who will tend to save more of it, particularly if they see the increased income from, say, a continued tax cut for the highest income people as temporary. The rich are much more likely, in other words, to fit Milton Friedman’s “Permanent Income Hypothesis” than are the unemployed, since the rich do not face liquidity constraints.

In addition to being a good source of economic stimulus, and thus benefiting those who are still employed, there is the obvious benefit to those who get the benefits. While we don’t want unemployment insurance to become a back-door form of welfare and all the dependency issues that raises, unemployment benefits help keep people out of poverty, especially in a deep recession. In 2009, it helped keep 3.4 million people out of poverty, up from 900,000 in 2008, and under 500,000 in 2007.

This is shown in the second graph below. Presumably the number will be just as large for 2010 as it was for 2009.

(Click to enlarge)

However, to the extent that people age out of even extended benefits without finding new jobs, the poverty rate will continue to rise. It normally does during and just after recessions, particularly if the recovery is slow and anemic as this one (not to mention the last two) has been so far. Even after the 1981-82 recession ended -- and that one featured a much stronger recovery -- the poverty rate continued to rise for a year afterwards.

Following the end of the previous recession, which ended in November 2001, we did not see a decline in the poverty rate until 2005, and then it was so small as to be virtually undetectable before it started to rise again. The path of the poverty rate during and after recessions is shown in the third graph. A high poverty rate is not good for business. It is also not good for social stability.

(Click to enlarge)

Disclosure: No positions