New claims for unemployment insurance rose last week to 584,000 — an increase of 25,000. However, the 4-week moving average of this volatile series fell to 559,000, a decline of 8,250.

As the chart below (from http://www.calculatedriskblog.com/) shows, the 4-week average looks to be well past its peak both in terms of time (16 weeks) and level (almost 100,000 below peak levels). This is significant in that it makes it increasingly unlikely that April was a false peak. Also, note the relationship of past peaks to the blue recession bars.

Historically, peaks in the 4-week average of new claims have come close to or at the end of recessions. As the experience of the last two recessions shows, though, it is not always a smooth decline, and the 4-week average can rise again, but as long as it doesn’t hit a new high for the cycle, it does not negate the end of recession signal.

With this week’s reading being above the 4-week average (and last week’s being right at the 4-week average, as of now), it would not be surprising to see a small increase in the average next week. A new claims reading above 569,000 next week would bring this about. And that might be the start of something like the pattern we saw in the last two recessions, where claims stayed elevated for a long time after the recession was officially over, but never hit new highs — sort of a mesa-shaped mountains.

There was further good news as continuing claims for regular state unemployment benefits fell to 6.194 million, a drop of 54,000. That was somewhat offset by an increase in those getting emergency extended benefits of 24,500 to 2.657 million.

It is hard to say, though, exactly why the continuing claims are coming down. If it is because people are finding new jobs, that is extremely good news. If it is because the benefits have simply run out, that is very bad news — and points to a rise in poverty.

It is hard to last long in this society with no income whatsoever coming in, which is essentially the fate of those whose benefits expire before they find new jobs. It is possible that many of them have turned to the underground economy, but more likely they are just going to have to cut back their consumption even more. The have probably long ago switch from shopping at Macy’s (M) to Wal-Mart (WMT); now they will have to shop at the Salvation Army and go to the food bank rather than Kroger’s (KR).

The unemployment report that is due out on Friday, August 7th will help shed some light on which path away from continuing claims people are taking. If it is because people are finding new jobs it will be a very positive sign for the economy. However, one of the more noteworthy features of this recession has been the very long duration of unemployment once people get their pink slips.

The median duration of unemployment in June was 17.9 weeks, a level that has completely shattered the old records, up from just 10.3 weeks at the start of the year. If that level continues to rise in next week’s employment report, it will be evidence that people are leaving the continuing claims pool for the “wrong” reason.

The second graph shows the history of the mean and median unemployment duration. Since both tend to peak well past the end of recessions I suspect that more people are leaving the continuing claims pool for the “wrong” reasons.

While the stimulus package has helped somewhat (see today’s New York Times) we may need a food bank bailout to follow the big bank bailout. That would help people who are in real need, and would cost taxpayers far less.

Read the full analyst report on “M”
Read the full analyst report on “WMT”
Read the full analyst report on “KR”
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Last 5 posts by Dirk Van Dijk

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