Jump In Initial Unemployment Claims an Ominous Omen

Earlier this week, we touched on how dependent any housing recovery is on an employment recovery.

Today, we received fresh reasons to worry.

Initial jobless claims unexpectedly rose last week, rising 30,000 to a seasonally adjusted total of 464,000 freshly unemployed Americans.

This is, frankly, terrible news. After improving for much of the year, in recent weeks the job market appears to be weakening. With so many already out of work, the economy can ill afford fewer consumers.

In related news, Congress appears poised to extend unemployment benefits to the 2.5 million jobless Americans whose benefits have expired. The new bill – already passed by the Senate, and heading to the House – will raise the total weeks of unemployment to 99, nearly a full two years.

Most economists are happy about this. Unemployment benefits are often thought of as some of the best stimulus money around, thanks to its high velocity. Unemployed workers don’t hoard the money – they use it to pay mortgages, or buy groceries and other staples. They use it to stay afloat and, in so doing, help blunt the effect of a shrinking consumer class on retail sales.

Additionally, it's cheap. The extension about to be passed will only cost $33.5 billion – virtually a rounding error in America's budget. Though Republicans have chosen to attempt to block the bill – as a symbol of their belt-tightening beliefs – this is both the wrong issue on which to make a stand, and not enough money to make a real difference in the deficit.

Extending unemployment benefits will help avoid a double-dip recession – and certainly help the millions of Americans who currently have no income – but it's no long-term solution.

Not to sound like a broken record – but, with so many out there touting the "jobless recovery," this bears repeating – until jobs return, the American economy will remain extremely vulnerable.

For now, the government's stimulus spending is propping up our economy (which, currently, is 70% consumer-based). But America's debt rating just slipped a grade. This can’t continue forever. If Keynes turns out to have been wrong – if priming the pump makes for a more comfortable downturn, but one ultimately exactly as damaging – then all we’ve done is prolong the inevitable.

And if stimulus dries up before new jobs appear to fill up the vacated space, the economy is virtually guaranteed another leg down.

For now, stick with investing in staples – between necessity and government benefits, they should survive our current uncertain situation better than most. If we do experience another dip, these will be the last companies standing. And, if we continue our slow growth out of this hole, they'll grow nearly as much as any other sector, with consumers switching to more expensive, premium brands.

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