We got some more good news on the intial claims for unemployment insurance front today, with the number of new claims dropping to 457,000, a decline of 5,000. That brought the four-week moving averge down to 481,250, a drop of 14,250.

The decline in this week’s initial claims brought the level to its lowest point since September of 2008. It was also the first time this year that the four-week moving average fell below the 500,000 mark.

As the graph below ( from http://www.calculatedriskblog.com/) shows, we have seen a dramatic decline in new claims since they peaked up back in April. Clearly the pace of layoffs has slowed down significantly. However, the problems seems to be more on the other side — it is not people losing jobs, but the inability of people who ared unemployed to find a new job.

Still, unlike the last two recessions, we have seen no sign of forming a high plateau of intial claims, and that is a very good sign that when job growth does come back that it could be stronger than expected.

The news was not nearly as good on the continuing claims front. Regular state claims for unemployument totaled 5.465 million, up 28,000 from last week. In addition, after 26 weeks those claims run out and people move over to extended claims, which are largely paid for by the Federal governement as part of the stimulus package.

There the growth was dramatic this week (actually the regular continuing claims data is from a week ago, and the extended claims is from two weeks ago, but sine it was released today I’m refering to it as this week’s data). Extended claims jumped by 323,000 when the two major programs are combined. This brought the level to 4.457 million, up from 4.134 million the previous week. Combining regular and extended claims, that means there are now 9.922 million people getting unemployment checks in the country.

For those that say the Stimulus Package has had no impact, I say tell that to the 4.4 million who would be left with no income at all in the absense of the stimulus package. Tell that to the banks like Bank of America (BAC) that might hold their mortgage, which they would have no hope of being able to continue to pay without the extended claims. Tell that to Wal-Mart (WMT), where they still are able to go to get the necessities of life.

As they spend their unemployment checks, that money flows back into the economy. If they were not spending those checks at Wal-Mart, that company would have to lay off the people stocking the shelves and working the checkout counters.  Unemployment insurance is referred to by economists as an automatic stabilizer of the economy — and it has been helping, and not just those who are getting the checks.

Tomorrow we find out if the rather steep decline we have seen in initial claims over the last month (indeed the last seven months, but particularly in the last month) has translated into a further decline in the number of jobs lost in the economy overall (it is a net number between job losses and new jobs, while inital claims only looks at job losses). Of particular interest will be the dration of unemployment numbers, whicha are at all-time highs by a very large margin. It is long-term unemployment that does the most damage to people, not an unscheduled vacation when you know your original job will come back.

When you first get your pink slip, people will cut back spending a bit, but they will not drop many long-term commitments if they think they will get another job soon. People fall back on savings, or if they don’t have much in the way of savings, they run up their credit card balances. Eventually, though, the card becomes maxed out, and the savings are depleted. Meanwhile their skills start to deteriorate and they become less appealing in the job market.

Ususally if someone has been out of work for more than six months, when they do find a job, it is at a substantially lower salary than the job they left. This means that one of the most lasting effects of the great recession will be a further hollowing out of the middle class, as those people who suffered bouts of long-term unemployment drop out of it.

While this was a mixed report, I think the initial claims side is more significant than the continuing claims side, and thus I count this report as a positive for the economy and the markets.  However, the big news will come tomorrow.

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market-beating Zacks Strategic Investor service.

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