Something is happening in the labor market, something good even. I'm still waiting to see if it is all a dream, the Giants winning the World Series, Republicans taking back the House, and the insured unemployed count the lowest it has been in two years. That said, without government intervention to extend benefits again, consumer spending could dive in the critical fourth quarter, labor recovery or not.
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Unemployment Claims Signal Labor Recovery, but Maybe Not Consumer Spending
This week's jobless data covering the period ended November 6 showed Weekly Initial Unemployment Claims dropped by 24K, to 435K, the lowest count in four months. Furthermore, the number of individuals receiving jobless benefits, at 4.301 million, was the lowest it has been in two years.
We cannot help but to be thrilled to report this good news, which following years of publishing warnings, feels surreal. Perhaps I am dreaming. Did the Giants really beat the Phillies and go on to win the World Series? Did the Republicans really just take back control of the House of Representatives just two years after leading the economy into near disintegration? Have I somehow slipped into a parallel universe, a bizarro world, where everything up is down and left is right? What's next, economic boom, runaway inflation and the ruination of fiat currency? Well, actually, I think yes on a couple of those. Sure glad I recommend gold ownership here a few years ago.
The latest week's unemployment insurance claims matched against the prior week's revised count of 459K. Claims have dipped below 450K before this latest dive, and each time it occurred it spurred stocks a bit. However, with claims unable to trend lower, the power of the news has been quickly lost to investors in the past. Still, perhaps what's brewing is opportunity for the real thing. Hold on though, before I get too giddy. We could be engaged in a wild war with Iran shortly, as commodity prices soar and terrorism threats convert into real attacks. Hey, barring that though, there's a chance for some more short-term profits in stocks.
We can see something happening very clearly in the four-week moving average, where initial jobless claims fell by 10K this week, to 446,500. Now that the moving average is short of 450K, it gets harder to not notice the change occurring. But perhaps it's just a matter of attrition.
Since this report measures first time filers for benefits, it cannot be attrition that is leading the data improvement. Rather, we are looking at the flow of newly unemployed into the jobless count. We all know what happens to a lake when the river flowing into it runs slower. This change in claims could help speed improvement in the unemployment pool, just by taking pressure off of it.
"...even if the unemployment rate improves on a lighter flow of newly jobless into the overall pool, consumer spending could still drop just as well."
Insured unemployment dipped another tenth of a percentage point, to 3.4% for the period ended October 30. That's good news, but let me issue another important warning, lest I be proclaimed an optimist! Uninsured unemployment is at risk of a dangerous shift higher in the near-term. Thus, even if the unemployment rate improves on a lighter flow of newly jobless into the overall pool, consumer spending could still drop just as well.
The problem is that funded unemployment insurance extensions are only in place until November 30. We assume the new Congress would not want to hamper the fourth quarter economy, which is critical for a broad segment of industries, including retail. So, while we normally would expect the government to seek to ease out of its extraordinary obligations, we hope that does not occur at this next critical juncture. Get us through Q4 Uncle Sam, and maybe we will be okay next year.
The total number of folks receiving some sort of unemployment benefit numbered a stunning 8.6 million as of October 23rd. Still, the total number of unemployed workers numbers closer to 15 million. Imagine that if the government does not extend unemployment insurance past November, somewhere around 2.3 million or so Americans will begin to lose their benefits. I base this number on the tally that existed in July, which has definitely changed some since, but probably not by much. These individuals will not be led off a cliff all at once though, however, they will be warned of the impending conclusion of their government aid. That knowledge alone will keep them from spending discretionary dollars as they prepare for the worst case scenario, unemployment without any income.
In conclusion, I expect the market will want to rally on further signs of employment gains, or less jobless flow, but if unemployment extensions find debate in Congress, that rally could be cut short or delayed until passage of favorable legislation. This would seem surely possible under the new fiscally conscious Republican Party leadership, but somehow I expect that post election actions might reflect differently then pre-voting rhetoric. At least I hope so with regard to employment insurance extensions, and let's not forget tax legislation.
The highest insured unemployment rates in the week ending Oct. 23 were in Puerto Rico (6.1 percent), Alaska (5.2), California (4.1), Oregon (4.1), Pennsylvania (4.0), Nevada (3.9), New Jersey (3.9), Connecticut (3.6), Arkansas (3.5), South Carolina (3.5), and Wisconsin (3.5).
The largest increases in initial claims for the week ending Oct. 30 were in California (+6,387), Kentucky (+2,901), Wisconsin (+2,644), Oregon (+2,296), and Indiana (+1,920), while the largest decreases were in Florida (-3,450), South Carolina (-2,401), Illinois (-997), Georgia (-923), and Pennsylvania (-897).
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