Tuesday, June 30, 2009
The labor market is almost surely the key to this recovery; renewed income growth would allow households to spend (i.e., add to the C of Y = C + I + G + NX), while at the same time, save in order to mend overly indebted balance sheets. And the consumer is key to this recovery, as residential investment - usually a big driver of growth during the recovery - is likely to be sluggish for some time (see this VOX article on credit-less recoveries, hat tip reader Steve C.)
So lets analyze the claims numbers. The labor cycle is still in the "contracting" phase; and except for April 2009, massive job loss has helped to pull down wages and salaries since August 2008. Going forward, initial claims suggest that the job loss is likely to slow.
The chart illustrates the 4-week moving average of initial unemployment claims as reported by the Department of Labor. Robert Gordon (see Econbrowser post from April 2009) noticed a pattern that is quite evident in the chart above: for each recession, the 4-week moving average is a good predictor of the recession's end. We will see if that happens this time.
But there is another thing to note here as well: once claims do peak, they tend to fall rather quickly. Therefore, history suggests that claims should start to drop off sharply in the second half of 2009 (coming months).
On the other side of the fence sits the stock of claimants, or continued claims. There was a big hoopla a couple of weeks ago, pointing to the exhaustion rate or the final claims numbers as evidence that people were simply going without benefits and not employed, rather than actually finding work. This is not true - well the not finding work part might be - there are plenty of benefits to be had.
The chart illustrates the total uninsured on the regular state programs plus the emergency benefits program (EB) plus the emergency unemployment compensation program (EUC-2008). By including the number of people that are collecting benefits under the EB and EUC-2008 programs, the total stock of claimants tallies closer to 9 million rather than the 6.1 million (not seasonally adjusted) claiming under the regular program.
I had a talk with Scott Gibbons (the DOL contact on the release). Including the benefits from EB and EUC-2008, a person can claim unemployment insurance benefits for up to 79 weeks (around 1.5 years) depending on which state he/she resides and whether the claims are completed in 2009 or 2010. My point is: there is a pretty big safety net out there right now.
Of course, all of those people are searching for jobs. And the initial claims numbers support big payroll declines for probably months to come. 2009 is still going to be rocky, even if GDP growth returns in the second half of the year.