The data on the Initial Claims for Unemployment Insurance this morning was disappointing. Initial jobless claims rose by 36,000 to 482,000. This caused the 4-week average to rise by 7,000 to 448,250. It was the first increase in the 4-week average since August 15th, when it stood at 571,000.

The 4-week average peaked back in April at 658,750, and as the chart below (from http://www.calculatedriskblog.com/) shows, it has been in a steep decline ever since. Despite this week’s setback we have made significant progress on that front, and are edging closer to the level which would be consistent with net job creation in the economy (probably a bit over 400,000).

After the last two recessions, the 4-week average formed an extended high plateau after coming off its peak, which was associated with the jobless recoveries that followed both of those downturns. So far, the pattern this time around has looked more like the old-time recessions of the 1970’s and early 1980’s, where once claims started to fall, they kept on falling.

Let us hope that this week does not mean we are starting that plateau process. However, before we get too worried about it, keep in mind that these numbers can be flaky, especially around the holidays when the seasonal adjustment factors are especially large. So while I am not happy about the increase, I’m not going to start losing sleep over them…yet.

Continuing Jobless Claims

The news on continuing jobless claims was mixed, but also on balance negative. Regular continuing claims dropped by 18,000 to 4.599 million. Regular claims have been in a steep decline in recent months, falling every week since 9/5 when they stood at 6.265 million. They peaked back on 6/27 at 6.904 million, so we have seen a one-third drop from the peak.

However, regular continuing claims do not tell the full story. They run out after 26 weeks. If you are still out of work then, you move over to the extended claims rolls, which are paid for by the federal government, while the regular claims are paid by state governments. These extended claims are one of the biggest parts of the ARRA, or Stimulus Package.

In December, there were more than six million people who had been out of work for more than 26 weeks, or almost 40% of all unemployed. Half or all the unemployed have been looking for work for 20.5 weeks or more. It’s not surprising, then, that extended benefit rolls are exploding. They now stand at 5.917 million (combining the two largest programs) an increase of 613,000 in the last week.

How the Stimulus Package Has Helped

In the first three months of fiscal year 2010, Federal Spending on unemployment benefits was $19.0 billion — higher than it was in the first three months of fiscal 2009. Aside from increased aid to states to pay for Medicare, it was the single-biggest increase of any line item in the Federal budget.

Without those extended benefits, almost six million people (and their families) would be left with no income at all. That is a near-perfect recipe for them to default on all their debts, especially their mortgages if they are underwater on their house. Thus indirectly, the extended benefits are another way of propping up the big banks that own those mortgages, like Bank of America (BAC) and JP Morgan (JPM). Those six million would probably max out their credit cards and then default on them, so the banks are benefiting on that front as well.

The income from the extended benefits also means that people can continue to buy basic goods from Wal-Mart (WMT) or Big Lots (BIG). As they do, it keeps the workers in those stores employed, as well as the workers who make and transport those goods on the job.

In fact as the second graph shows (from this source) according to the non-partisan Congressional Budget Office Incorporatedreasing aid to the unemployed is one of the most cost-effective ways to create jobs there is. In fact, of all the policy options they looked at, the only other one that carries close to as much bank for the buck would be to reduce payroll (Social Security and Medicare) taxes on employers who show a net increase in their payrolls. Thus, it is wise spending from a hard nosed economic point of view as well as from a humanitarian point of view.

Perhaps it is just a coincidence, but the rapid decline in the 4-week moving average of initial claims started almost immediately after the Stimulus Package started to take effect (passed near the end of February, and it took a month or so before things could really get rolling). Without the Stimulus Package, the economic situation would have been FAR worse. The problem with it was that it was too small to do the job, given the enormity of the economic disaster we were (and are) facing.

All in all, this was a disappointing report, but one week does not make a trend, especially with this data coming as it did around the holidays.

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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