Initial Jobless Claims Back Up

Initial jobless claims for unemployment insurance rose by 7,000 last week to a seasonally adjusted rate of 480,000. This was the second week in a row that they have risen. However, they had been on a steep downward slope before that, and the four-week moving average (generally considered a better indicator due to the instability of the weekly data) fell by 5,250 to 467,500.

Clearly, though, the four-week average cannot continue to fall if the weekly jobless claims keep going up. As the chart below (from http://www.calculatedriskblog.com/) shows, the four-week average in jobless claims is about 175,000 below its peak set back in April. We are also well below the 535,250 level the four-week average was at a year ago. This is extremely good news regarding jobless claims, but not good enough.

We need to get the jobless claims average closer to 400,000 to indicate that the economy is actually adding jobs, rather than merely losing them at a slower rate. So far, the behavior of the initial jobless claims series looks much more like the recessions of yore; not like the last two downturns, where after an initial pullback, claims bounced around in a high plateau, one of the symptoms of a jobless recovery.

Of course, those downturns were nowhere near as deep as this Great Recession, and even with the decline, we are only just getting back to around the peak levels during those recessions. The back-to-back increases in jobless claims, while relatively small, raise the question whether we are about to enter that plateau stage, or if they are just noise in what is normally a noisy series of jobless claims.

The other economic data (for example, the Industrial Production and New Home Starts) we have been getting suggests that it is just noise. But that data is all for November and earlier — not as close to real time as the initial jobless claims data is.

The news was not much better on the continuing jobless claims front. Continuing jobless claims rose to 5.186 million, an increase of 5,000. While the increase was not that large, it is a reversal of a strong downtrend in the regular state continuing jobless claims series.

The regular continuing jobless claims numbers are deceptive and do not come close to telling the full unemployment insurance story. These jobless claims run out after just 26 weeks, and in November, half of all the unemployed had been out of work for more than 20.1 weeks, and 38.3% for more than the regular 26-week period. Those people move over to the extended benefits programs, paid for by the Federal Government, and largely paid for through the various stimulus packages (recall that there was a small stimulus package in the Spring of 2008, as well as the ARRA which passed in late February 2009).

The number of people getting extended unemployment benefits (two largest programs combined) rose by 143,750 to 4.729 million. The press and analysts are making a serious mistake if they only focus on the regular benefits data as the extended jobless claims are now almost as large as the regular jobless claims. The number to focus on is the 9.915 million total people getting benefits, not just the 5.186 million getting regular jobless claims benefits.

Unlike initial jobless claims, continuing and extended jobless claims are both well above year-ago levels. A year ago there were 4.356 million people getting regular unemployment benefits and 1.017 million getting extended benefits, or a total of 5.373 million.

If anything, it is the people on extended benefits that we should be most concerned about. After all, if you are out of work for three or four weeks, it really isn’t that big a deal — sort of like an unscheduled vacation (provided you know you are going back to work soon). Long-term unemployment has devastating consequences, and not just in a financial sense.

On Tuesday, the New York Times had a very interesting (and depressing) story based on a poll of the unemployed about the effects joblessness has had on them and their families. You can read the article here. More than 60% of the unemployed have had to tap into their retirement accounts to make ends meet (and getting a good swift kick in the gut from the IRS for doing so), almost half are without health insurance (even though the ARRA subsidizes COBRA payments) and more than half have cut back on going to the doctor.  More than a quarter have either been threatened with eviction or foreclosure, or have actually lost their home.

Economically, those extended benefits have allowed those people to continue to spend on basic necessities. If they had been unable to do so, then the cashiers and stock people at Wal-Mart (WMT) would have been laid off, since they would not have been able to shop there. The truckers working for YRC would not have had as many loads to haul, and many of them would have been laid off.

Because the unemployed are the people who are most likely to spend an incremental dollar the fastest (but also relatively unlikely to spend it frivolously) the money they get tends to have a very large multiplier effect. Thus, it is not just for humanitarian reasons that the extended benefit program has been a good thing. However, finding a way to create real new jobs so they don’t need the extended benefits would be an even better thing by a very large margin.

Unfortunately, while the pace of layoffs has come way down (the big drop in initial jobless claims is good evidence of this) the pace of job creation has not started. Regardless of the overall economic conditions, there are always both layoffs and new hiring going on, but it is the relative levels of both that shows up in the jobless claims data. The evidence very much suggests that the problem is on the uptake side, rather than on the new additions side.

The recent “Cash for Caulkers” plan proposed by President Obama strikes me as a very good idea in this regard. It targets one of the professions (construction workers) that has been hardest hit in this downturn. Over the last year, construction employment has fallen by almost 1 million and is almost 1.8 million, or 23% below the peak level set in January of 2007.

In addition to the direct construction worker jobs, it would also stimulate employment at companies like Owens Corning (OC) and RPM International (RPM). The ancillary benefit would be that it would significantly increase the nation’s energy efficiency, and reduce out trade deficit over the long run.

Controlling the trade deficit is at least as important as controlling the budget deficit over the long term. After all, it is the trade deficit that determines just how much we owe to China and OPEC, not the budget deficit. Unless we get our oil addition habit under control, we will have an exceptionally difficult time in getting the trade deficit under control. Also, any reduction in the trade deficits translates dollar for dollar into GDP growth. The Cash for Caulkers program appears to be a very effective way of reducing energy costs, and with them, the trade deficit.

The market also realizes just how important getting the trade deficit under control is, even if most market commentators are clueless about it. That is why the market goes up when the dollar goes down and vice versa. A weak dollar will stimulate our exports and reduce or imports, thus boosting economic growth.

Since many firms get a large proportion of their revenues from abroad, currency translation effects also boost corporate earnings. Right now a weak dollar is needed, and is not something to be feared. Those that make it out as some sort of crisis are not only wrong, but dangerously wrong.

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.

Zacks Investment Research

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