Unemployment Claims Continue To Pile Up, Setting New Records

Jobless Claims Fall Again

As expected, in the week of May 2nd, initial jobless claims fell again. This time they were down from 3.846 million to 3.169 million which was above estimates for 3.041 million. Prior week’s report was only revised higher by 7,000. Initial claims are now below their 4 week average as the trend is lower. 

To be clear, we aren’t close to an improvement in the labor market. This is simply the situation getting less bad because it has to. It’s literally impossible for there to have been any more claims than there were in the past 7 weeks. Even with this being the 5th straight decline, the number of initial claims is higher than ever (other than the prior few weeks).

Backlog Being Worked Through

It’s clear that there are two main factors in play that are keeping claims so high. First is the backlog of claims being worked through. When this situation first started getting bad in mid to late March, systems were overwhelmed with the number of claims. That’s not surprising because there hadn’t been a recession in 11 years. Just think of where technology was 11 years ago. Some states didn’t invest enough to develop their websites. They couldn’t handle the amount of traffic sent their way. 

Even if they did invest in them appropriately, they still would have struggled with this spike because this increase in unemployment is by far the worst ever. It took about 3 years in the Great Depression for the unemployment rate to reach its peak. In this recession, it will take about 3-4 months for the unemployment rate to get above that high.

As you can see from the chart above, there was a huge increase in initial claims as percent of the labor market in Georgia, Florida, and Washington. Many of those claims were likely due to the backlog. As you can see, Georgia and Michigan have above 25% of their labor forces on the dole receiving unemployment benefits. This is likely partially why Georgia became one of the first states to reopen. 

Obviously, the backlog isn’t the only reason claims are this high. Some firms are running out of cash still. Generally, the companies that were in a tough situation before this recession are going bust. They are using this recession as an excuse for their own mistakes.

We have results on a few states’ backlogs. Washington has a backlog of 265,000 claims that it aims to get through by June. If someone is unemployed for a couple months before getting help, they will likely be in dire financial shape since many don’t have emergency savings to lean on. In Illinois, the governor claimed there was no backlog, but there are reports there is a backlog of 12,000 claims. New Jersey stated it will get through its backlog of gig economy workers by next week.

It’s good that a lot of the new claims aren’t new people who just lost their jobs. That means the situation is getting less bad at an even quicker rate than the headline numbers suggest. Once the backlogs are removed claims should fall further. That will coincide with the states reopening which will also prevent future job losses. 

Pantheon Macro is forecasting initial claims to fall below 1 million in June. Backlogs will be gone by then. On the other hand, it’s obviously bad people had to wait this long. If people were severely hurt by this lack of help, their spending power isn’t going to come back quickly. This won’t be a V-shaped recovery.

It’s Better To Be Unemployed

It’s the best time to be unemployed in history. That’s because of the extra $600 people are getting per week from the federal government. As you can see from the chart below, workers in more than half of states are receiving on average more in unemployment benefits than their normal wages. If everyone that lost their job can get these benefits, the economy should be able to recover. We have no doubt that if COVID-19 stays bad, these benefits will be extended. 

On the other hand, many people might be filing because they see this great potential payday. People might not want to get a job. The government is going to have to end this payday eventually to encourage people to go back to work. Many people will want to work because they will fear their old job being given to someone else. Plus, unemployment insurance is uncertain because it’s temporary. It makes sense to get a job before the benefits expire if you can.

The chart shows each state’s situation. Every state has different average wages and they have different benefit plans. Left end of the line shows the percentage of initial pay the average workers got when they were unemployed. Right end shows after the added $600. 

A few states show workers getting over 20% more to be unemployed. Georgian workers are getting slightly less money. That’s not good for that hard hit state. In the 2008 recession, almost everyone was worse off after they lost their job, but in this recession, if you make less than $60,000, you are in better financial shape by not having one.

Extremely High Continuing Claims

As you’d expect, continuing claims were high. We knew they’d be high because this data is delayed by a week. In the week of April 25th, there were 22.647 million claims which is obviously by far a record. Remember, when continuing claims start to fall, the recession will be near its end. 

Judging by the speed of the spike, the fact that the $600 benefit will eventually expire, and that states are reopening, it seems likely we will have the fastest decline ever. Now, I’m not saying the decline will be as quick as the rise. With the speed of previous cycles, it would take over a decade to get back to normal. We could see normalcy within a few years like the previous recessions even though this one is several orders of magnitude worse.