Initial Claims for Unemployment Insurance rose by 25,000 last week to 429,000. However, last week was revised up by 1,000, so one could see it as a 26,000 increase. This was worse than the expected level of 390,000.
The trend in initial claims has been downward, although there have been some bumps along the way. Recently, though, they have started to trend back up again. That is a very worrisome trend. The weekly numbers, after an erratic few months, seemed to have broken decisively to the downside.
This week did a lot of damage, and makes it hard to see the trend still being in the right direction. Let us hope the decline resumes next week. Like the weather, there is a trend towards warming in the spring, but that does not mean that next week will be warmer than this week -- though we can be fairly sure that June will be warmer than January.
This is the third straight week we have been above the 400,000 level. Being below it, probably signaled the start of much more robust job growth. Now it looks like we are headed back to the “trading range” that initial claims were in for almost all of 2010. Initial claims had been generally trending down since they hit a secondary peak of 504,000 (after revisions) on 8/14.
Track the 4-Week Moving Average
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 rose by 9,250 to 408,500. The four-week average climbing above the psychologically important 400,000 level, is a very bad sign.
As far as the domestic economy is concerned, robust job creation has been the last big part of the puzzle to fall into place. If it can withstand the pressures from government budget cuts, the disaster in Japan and the increased oil prices is an open question. It looks like those factors are starting to take their toll.
Things had been starting to look better on the jobs front, but the last few weeks' numbers are a bit of a wet towel. Still, relative to a year ago, the four-week average is down by 60,250 or 12.9%.
Unemployment Rate to Tick Up?
The economy is growing, but is only starting to add a significant number of jobs and to put a dent in the huge army of the unemployed. The March employment report was encouraging, but we still have a very long way to go. We added a total of 216,000 jobs according to the establishment survey, as the private sector total of 230,000 was offset by the loss of 14,000 jobs in state and local government. The unemployment rate dipped to 8.8% from 8.9%.
January and February both had net positive revisions, with private sectors jobs revised up more than public sector jobs were revised down. These numbers make it likely that when the March jobs report is released next Friday, the number of jobs added will be lower than in March, perhaps down in the area of 150,000 total jobs added (about 170,000 adds in the private sector, offset by the loss of 20,000 government jobs).
We might even see a slight uptick in the unemployment rate. The first graph (from this source) shows the long term history of the four-week average of initial claims.
So why is the 400,000 level so significant? The next graph shows why. Historically that has been the inflection point where the economy starts to add a lot of jobs. It layers over the monthly gain or loss in private sector jobs (red line, right hand scale) and total jobs (green line). Unfortunately the automatic scaling did not put a line at zero for the job growth line, so you will have to eyeball it a bit.
Notice the strong inverse correlation between job growth and initial claims, and how when the blue initial claims number is below the 400,000 level that job growth is strong. OK, it is not that an increase from 399,000 to 400,000 is all that much difference than from 397,000 to 398,000 or from 402,000 to 403,000, but big round numbers are psychologically important, especially when that round number is near a historical inflection point.
Continuing Claims
The data on regular continuing claims is moving in the right direction, and is considerably more upbeat than the initial claims data. Regular continuing claims for unemployment insurance fell by 68,000 to 3.641 million. The overall trend is strongly in the right direction. Continuing claims are down by 1.034 million or 22.1% from a year ago.
Regular claims are paid by the state governments, and run out after just 26 weeks (although several states have recently lowered the number of weeks they are going to pay in the future). The next graph shows the long-term history of continuing claims for unemployment, as well as the percentage of the covered workforce that is receiving regular state benefits. It does a good job of showing just how nasty that the Great Recession was for the job market. It also shows how things at the regular state unemployment benefit level have been getting much better over the last year (but still well above the peaks of the last two recessions.
Note that the insured unemployment rate generally follows the direction of the number of claims, but has been gradually diverging over time. That is a function of the overall growth of the labor force, and of tighter eligibility standards for getting unemployment insurance over time. It also reflects the fact that this time around a very large proportion of those getting unemployment benefits are getting them from the extended Federal programs, not from the regular state programs.
In March, half of all the unemployed had been out of work for 21.7 weeks (down from a record high of 25.5 weeks in June, but up from 21.2 weeks in February), and 45.5% had been out of work for more than 26 weeks. Just for a point of perspective, prior to the Great Recession, the highest the median duration of unemployment had ever reached was 12.3 weeks near the bottom of the 82-83 downturn. Clearly a measure of unemployment that by definition excludes 45.5% of the unemployed paints a very incomplete picture.
The number of short-term unemployed (less than 5 weeks) was actually exceptionally low. The problem in terms of employment is not a lot of firing, but a lack of hiring. This has been the case for some time now.
After the 26 weeks are up, people move over to extended benefits, which are paid for by the Federal government. While regular claims are down, it is in large part due to people aging out of the regular benefits and “graduating” to extended benefits. Unfortunately, the data on extended claims in prior recessions is not available at the St. Louis Fed database. However, given the extraordinary duration of unemployment, it is a safe bet that they are higher than in previous downturns.
The extended claims have also been trending down, but it has been a bumpy decline. They (the two largest programs combined) fell by 76,000 to 4.165 million this week. Relative to a year ago they are down 1.279 million or 23.5% A much better measure is the total number of people getting benefits, regardless of which level of government pays for them. Combined, regular claims and extended claims (including a few much smaller programs) fell by 113,000 on the week and are down 2.323 million or 22.1% over the last year.
(The extended claims numbers are not seasonally adjusted, while the initial and continuing claims are, so there is always little bit of apples-to-oranges. In addition, the continuing claims data are a week behind the initial claims, and extended claims are a week behind the extended claims data.)
Tax Cut Extension & Extended Benefits
Even with the deal that extended unemployment benefits for this year in exchange for continuing the top end of the Bush tax cuts, people will still “graduate” from the system after 99 weeks, but people will continue to be able to move to the next tier up to the 99 week limit. Extended benefits are in four different tiers, so if benefits had not been extended, some people would have lost their benefits after just 39 weeks of being out of work. The key point, though, is that the year long extension does not mean that some people will be getting benefits for a total of 151 weeks, as is sometimes thought.
The downside to the deal was that it will reverse the downward trend in the budget deficit and cause the deficit to be higher in fiscal 2011 than it was in fiscal 2010, and is now projected to exceed the 2009 record deficit. The extended benefit portion of the deal was not the main reason the deficit is going up, the extension of the high end Bush tax cuts, and particularly the 2% payroll tax holiday played a bigger role.
The fiscal stimulus from the payroll tax cut is being undermined by cuts in other domestic government spending. The result of the deal to cut $39 billion in spending for the rest of this fiscal year will be a slower economy and hundreds of thousands of fewer jobs. That, in turn, will significantly undermine the deficit reduction that is the supposed aim of the exercise.
Many of the cuts, such as a $600 million cut for the IRS, do not seemed to be designed to reduce the budget deficit anyway, but to accomplish other objectives. Given the refusal to accept any form of revenue increase, I really do not think that they are serious about deficit reduction -- it is just a cover for other goals.
The View from Capitol Hill
While the employment picture is starting to get better, in any absolute sense it is still just plain awful. The pace of improvement appears to be slowing significantly based on the initial claims data over the last few weeks. The policies that are being debated in Congress are all things that would slow the economy, not speed it up.
The one exception is the Federal Reserve, which is doing its part by keeping rates low and by using quantitative easing. While that helps a little bit, it is also much less effective than fiscal stimulus would be. Right now monetary policy is sort of “pushing on a string.” In any case, QE2 is going to end in June, and the likelihood of it being followed by QE3 is very low right now.
Some claim that the long duration of unemployment benefits has actually discouraged people from looking for work. That is, people are content to live forever on 60% of their previous income, or $400 per week, whichever is lower. The average benefit is only about $300 a week. Ask yourself how well could you live on $300 per week.
Right now (well as of the February JOLTS data) there are almost 4.4 people out of work for each job opening. Just telling all of them to “get a job” isn't going to work. The extension of benefits is one of the key reasons that initial claims are falling. While that may sound counter-intuitive, it is because extended benefits are a very effective form of economic stimulus.
The graph below (from this source) shows the ratio of jobless to job openings since the JOLTS data first started tracking job openings. As with so many other things, we are making progress and headed in the right direction, but the absolute level is still awful.
Extended Benefits = Economic Stimulus
Extended unemployment benefits are, dollar of dollar, one of the most effective forms of economic stimulus there is. It is a pretty good bet that the people losing their extended benefits have depleted their savings and run up all the debt they can in trying to make ends meet. The maximum unemployment benefit works out to be just $20,800 per year, or less than the poverty line for a family of four. You think any of those people have been able to sock any of that away?
There is a concern that by cushioning the blow of unemployment, people might be more reluctant to take a marginal job opportunity, but a below poverty level income is not that much of a cushion. I'm not sure it is good for the economy for highly skilled people to be taking jobs in other fields that have no use of those skills, and then be unavailable when those skills are needed again.
The people who get extended benefits tend to spend the money quickly on basic needs. This, in turn, keeps customers coming in the door at Wal-Mart (WMT) and Family Dollar (FDO). 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.
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 (KR). These customers keep the people at Wal-Mart, Family Dollar 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. They will not be buying absolutely frivolous things like water imported from halfway around the world (Fiji water).
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.
Also, if you remember your Friedman, velocity of money counts, and it counts a great deal. P * Q = M * V. Price times quantity in the aggregate is nominal GDP, and it is equal to the amount of money in circulation times how quickly it changes hands. Money in the hands of the unemployed has a much higher velocity than money in the hands of a multi millionaire.
There really is not good way to tell from this report if the decline in the number of people receiving benefits is due to them getting new jobs, or due to even the extended benefits running out. If it is the former, it is very good news. If it is the latter, it just means more people are falling into absolute destitution.
That is not good news for either the economy or for social stability. Both the very high unemployment duration numbers and the very low civilian participation rate (unchanged at 64.2% in March, but down from 64.9% a year ago), would suggest that it is the unhappy latter case that is happening.
Discouraging Report
The longer term trend is still in the right direction, but continued declines are not guaranteed. The 4-week average rising above the 400,000 level is a discouraging sign. In the last two recoveries, when it got below that threshold, that job creation really started to take off. If it stays there, we will climb the "Stairway to Heaven" of a rapidly falling unemployment rate. If it shoots above 500,000 then we are on the "Highway to Hell." The current level, if we stay here for a prolonged period of time, puts us back into the "Sitting in Limbo" of a pseudo recovery.
The increase this week is troubling, as was the fact that it was much worse than forecast. This series can be volatile from week to week. It is not yet a reason to despair, but if claims continue to climb over the next few weeks it will be.
Still, relative to where we were just a few months ago, all numbers still look pretty good. The continuing and extended claims numbers look much more promising, but only if people are leaving the rolls for the “right reason." If they are leaving for the wrong reason, that the benefits have simply run out, the declines are not really good news (even if they do help reduce government spending), they are just a reflection of millions of people slipping into poverty. Hardly a thing to celebrate.
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Market News and Data brought to you by Benzinga APIsThe trend in initial claims has been downward, although there have been some bumps along the way. Recently, though, they have started to trend back up again. That is a very worrisome trend. The weekly numbers, after an erratic few months, seemed to have broken decisively to the downside.
This week did a lot of damage, and makes it hard to see the trend still being in the right direction. Let us hope the decline resumes next week. Like the weather, there is a trend towards warming in the spring, but that does not mean that next week will be warmer than this week -- though we can be fairly sure that June will be warmer than January.
This is the third straight week we have been above the 400,000 level. Being below it, probably signaled the start of much more robust job growth. Now it looks like we are headed back to the “trading range” that initial claims were in for almost all of 2010. Initial claims had been generally trending down since they hit a secondary peak of 504,000 (after revisions) on 8/14.
Track the 4-Week Moving Average
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 rose by 9,250 to 408,500. The four-week average climbing above the psychologically important 400,000 level, is a very bad sign.
As far as the domestic economy is concerned, robust job creation has been the last big part of the puzzle to fall into place. If it can withstand the pressures from government budget cuts, the disaster in Japan and the increased oil prices is an open question. It looks like those factors are starting to take their toll.
Things had been starting to look better on the jobs front, but the last few weeks' numbers are a bit of a wet towel. Still, relative to a year ago, the four-week average is down by 60,250 or 12.9%.
Unemployment Rate to Tick Up?
The economy is growing, but is only starting to add a significant number of jobs and to put a dent in the huge army of the unemployed. The March employment report was encouraging, but we still have a very long way to go. We added a total of 216,000 jobs according to the establishment survey, as the private sector total of 230,000 was offset by the loss of 14,000 jobs in state and local government. The unemployment rate dipped to 8.8% from 8.9%.
January and February both had net positive revisions, with private sectors jobs revised up more than public sector jobs were revised down. These numbers make it likely that when the March jobs report is released next Friday, the number of jobs added will be lower than in March, perhaps down in the area of 150,000 total jobs added (about 170,000 adds in the private sector, offset by the loss of 20,000 government jobs).
We might even see a slight uptick in the unemployment rate. The first graph (from this source) shows the long term history of the four-week average of initial claims.
So why is the 400,000 level so significant? The next graph shows why. Historically that has been the inflection point where the economy starts to add a lot of jobs. It layers over the monthly gain or loss in private sector jobs (red line, right hand scale) and total jobs (green line). Unfortunately the automatic scaling did not put a line at zero for the job growth line, so you will have to eyeball it a bit.
Notice the strong inverse correlation between job growth and initial claims, and how when the blue initial claims number is below the 400,000 level that job growth is strong. OK, it is not that an increase from 399,000 to 400,000 is all that much difference than from 397,000 to 398,000 or from 402,000 to 403,000, but big round numbers are psychologically important, especially when that round number is near a historical inflection point.
Continuing Claims
The data on regular continuing claims is moving in the right direction, and is considerably more upbeat than the initial claims data. Regular continuing claims for unemployment insurance fell by 68,000 to 3.641 million. The overall trend is strongly in the right direction. Continuing claims are down by 1.034 million or 22.1% from a year ago.
Regular claims are paid by the state governments, and run out after just 26 weeks (although several states have recently lowered the number of weeks they are going to pay in the future). The next graph shows the long-term history of continuing claims for unemployment, as well as the percentage of the covered workforce that is receiving regular state benefits. It does a good job of showing just how nasty that the Great Recession was for the job market. It also shows how things at the regular state unemployment benefit level have been getting much better over the last year (but still well above the peaks of the last two recessions.
Note that the insured unemployment rate generally follows the direction of the number of claims, but has been gradually diverging over time. That is a function of the overall growth of the labor force, and of tighter eligibility standards for getting unemployment insurance over time. It also reflects the fact that this time around a very large proportion of those getting unemployment benefits are getting them from the extended Federal programs, not from the regular state programs.
In March, half of all the unemployed had been out of work for 21.7 weeks (down from a record high of 25.5 weeks in June, but up from 21.2 weeks in February), and 45.5% had been out of work for more than 26 weeks. Just for a point of perspective, prior to the Great Recession, the highest the median duration of unemployment had ever reached was 12.3 weeks near the bottom of the 82-83 downturn. Clearly a measure of unemployment that by definition excludes 45.5% of the unemployed paints a very incomplete picture.
The number of short-term unemployed (less than 5 weeks) was actually exceptionally low. The problem in terms of employment is not a lot of firing, but a lack of hiring. This has been the case for some time now.
After the 26 weeks are up, people move over to extended benefits, which are paid for by the Federal government. While regular claims are down, it is in large part due to people aging out of the regular benefits and “graduating” to extended benefits. Unfortunately, the data on extended claims in prior recessions is not available at the St. Louis Fed database. However, given the extraordinary duration of unemployment, it is a safe bet that they are higher than in previous downturns.
The extended claims have also been trending down, but it has been a bumpy decline. They (the two largest programs combined) fell by 76,000 to 4.165 million this week. Relative to a year ago they are down 1.279 million or 23.5% A much better measure is the total number of people getting benefits, regardless of which level of government pays for them. Combined, regular claims and extended claims (including a few much smaller programs) fell by 113,000 on the week and are down 2.323 million or 22.1% over the last year.
(The extended claims numbers are not seasonally adjusted, while the initial and continuing claims are, so there is always little bit of apples-to-oranges. In addition, the continuing claims data are a week behind the initial claims, and extended claims are a week behind the extended claims data.)
Tax Cut Extension & Extended Benefits
Even with the deal that extended unemployment benefits for this year in exchange for continuing the top end of the Bush tax cuts, people will still “graduate” from the system after 99 weeks, but people will continue to be able to move to the next tier up to the 99 week limit. Extended benefits are in four different tiers, so if benefits had not been extended, some people would have lost their benefits after just 39 weeks of being out of work. The key point, though, is that the year long extension does not mean that some people will be getting benefits for a total of 151 weeks, as is sometimes thought.
The downside to the deal was that it will reverse the downward trend in the budget deficit and cause the deficit to be higher in fiscal 2011 than it was in fiscal 2010, and is now projected to exceed the 2009 record deficit. The extended benefit portion of the deal was not the main reason the deficit is going up, the extension of the high end Bush tax cuts, and particularly the 2% payroll tax holiday played a bigger role.
The fiscal stimulus from the payroll tax cut is being undermined by cuts in other domestic government spending. The result of the deal to cut $39 billion in spending for the rest of this fiscal year will be a slower economy and hundreds of thousands of fewer jobs. That, in turn, will significantly undermine the deficit reduction that is the supposed aim of the exercise.
Many of the cuts, such as a $600 million cut for the IRS, do not seemed to be designed to reduce the budget deficit anyway, but to accomplish other objectives. Given the refusal to accept any form of revenue increase, I really do not think that they are serious about deficit reduction -- it is just a cover for other goals.
The View from Capitol Hill
While the employment picture is starting to get better, in any absolute sense it is still just plain awful. The pace of improvement appears to be slowing significantly based on the initial claims data over the last few weeks. The policies that are being debated in Congress are all things that would slow the economy, not speed it up.
The one exception is the Federal Reserve, which is doing its part by keeping rates low and by using quantitative easing. While that helps a little bit, it is also much less effective than fiscal stimulus would be. Right now monetary policy is sort of “pushing on a string.” In any case, QE2 is going to end in June, and the likelihood of it being followed by QE3 is very low right now.
Some claim that the long duration of unemployment benefits has actually discouraged people from looking for work. That is, people are content to live forever on 60% of their previous income, or $400 per week, whichever is lower. The average benefit is only about $300 a week. Ask yourself how well could you live on $300 per week.
Right now (well as of the February JOLTS data) there are almost 4.4 people out of work for each job opening. Just telling all of them to “get a job” isn't going to work. The extension of benefits is one of the key reasons that initial claims are falling. While that may sound counter-intuitive, it is because extended benefits are a very effective form of economic stimulus.
The graph below (from this source) shows the ratio of jobless to job openings since the JOLTS data first started tracking job openings. As with so many other things, we are making progress and headed in the right direction, but the absolute level is still awful.
Extended Benefits = Economic Stimulus
Extended unemployment benefits are, dollar of dollar, one of the most effective forms of economic stimulus there is. It is a pretty good bet that the people losing their extended benefits have depleted their savings and run up all the debt they can in trying to make ends meet. The maximum unemployment benefit works out to be just $20,800 per year, or less than the poverty line for a family of four. You think any of those people have been able to sock any of that away?
There is a concern that by cushioning the blow of unemployment, people might be more reluctant to take a marginal job opportunity, but a below poverty level income is not that much of a cushion. I'm not sure it is good for the economy for highly skilled people to be taking jobs in other fields that have no use of those skills, and then be unavailable when those skills are needed again.
The people who get extended benefits tend to spend the money quickly on basic needs. This, in turn, keeps customers coming in the door at Wal-Mart (WMT) and Family Dollar (FDO). 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.
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 (KR). These customers keep the people at Wal-Mart, Family Dollar 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. They will not be buying absolutely frivolous things like water imported from halfway around the world (Fiji water).
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.
Also, if you remember your Friedman, velocity of money counts, and it counts a great deal. P * Q = M * V. Price times quantity in the aggregate is nominal GDP, and it is equal to the amount of money in circulation times how quickly it changes hands. Money in the hands of the unemployed has a much higher velocity than money in the hands of a multi millionaire.
There really is not good way to tell from this report if the decline in the number of people receiving benefits is due to them getting new jobs, or due to even the extended benefits running out. If it is the former, it is very good news. If it is the latter, it just means more people are falling into absolute destitution.
That is not good news for either the economy or for social stability. Both the very high unemployment duration numbers and the very low civilian participation rate (unchanged at 64.2% in March, but down from 64.9% a year ago), would suggest that it is the unhappy latter case that is happening.
Discouraging Report
The longer term trend is still in the right direction, but continued declines are not guaranteed. The 4-week average rising above the 400,000 level is a discouraging sign. In the last two recoveries, when it got below that threshold, that job creation really started to take off. If it stays there, we will climb the "Stairway to Heaven" of a rapidly falling unemployment rate. If it shoots above 500,000 then we are on the "Highway to Hell." The current level, if we stay here for a prolonged period of time, puts us back into the "Sitting in Limbo" of a pseudo recovery.
The increase this week is troubling, as was the fact that it was much worse than forecast. This series can be volatile from week to week. It is not yet a reason to despair, but if claims continue to climb over the next few weeks it will be.
Still, relative to where we were just a few months ago, all numbers still look pretty good. The continuing and extended claims numbers look much more promising, but only if people are leaving the rolls for the “right reason." If they are leaving for the wrong reason, that the benefits have simply run out, the declines are not really good news (even if they do help reduce government spending), they are just a reflection of millions of people slipping into poverty. Hardly a thing to celebrate.
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