They're Going to Try to Scare You Again. Don't Let Them. Part III.

Two posts ago, I addressed how the media would try to use what would be a significant increase in Initial Jobless Claims to try to scare you. I talked about the results of that release in my last post, which addressed the unemployment rate. This post will focus on Continued Claims, which I introduced in the post about Initial Claims.

But first - the Curmudgeon would like to offer his humble thanks to all who shared the link to the post on Initial Claims. It was the most-read post in the history of this blog. So keep the shares coming, and maybe we can keep a lot more people from being scared (for the record, I don't make a cent from doing this). And if you liked the most recent post, feel free to share it too.

As a reminder, Continued Claims is the aggregate number of people receiving unemployment insurance benefits in a given week. There is a one-week lag in reporting the number vs. Initial Jobless Claims. Thus the Continued Claims number that was released on Thursday, March 26 showed total claimants as of the week ended March 14, whereas the Initial Claims number released that morning was for first-time filings as of the week ended March 21.

Now, it stands to reason that if initial claims spike, the following week's continued claims will jump. You may recall that initial claims captures people who file for the first time, then the next week they fall out of that total and move into the continued claims number, where they stay until they no longer qualify for benefits (found a job, no longer looking, benefits expired, etc.).

The move from initial to continued claims is not a precise additive transition. For example, initial claims for the week ended Mar. 7 were 211,000. The increase in continued claims from the week ended Mar. 7 to that ended Mar. 14 was 101,000, not 211,000. This could be due to some of the first-time filers going back to work (unlikely), some of the previously reported continued claimants going back to work (thus there were people moving into and out of the continued claims pool), or delays between filing and receiving benefits.

So, the continued claims total reported on Thursday, April 9 for the week ended Mar. 28 is unlikely to show an increase equal to the 3.3 million initial filers that we saw in the initial claims release for the week ended Mar. 21, which came out last Thursday and was the topic of that original post. But there will be a very large increase, easily over 1 million. The most recent reading was just over 1.8 million, so the number will increase by more than half, and could certainly double, or worse.

And the media is going to try to scare you with it.

The headlines this time will be:
"Highest continuing jobless claims since (probably 2012 or 2013, depending on the number)!"
"Biggest one-week increase in continuing claims in history!" (It will be.)
"Continuing jobless claims doubled in just one week (if the number does double)!"

And, as they always do because they are woefully under-qualified to report on economic data, they will muck up the terminology they use and the ways they abuse the data to the point that my Curmudgeonly head explodes, and I find myself standing in front of the television and cussing at it. (I'm doing a lot of that these days - my dogs are very confused.)

However, you should not be fearful as a result of the number, for several reasons. The first is that you now understand what it means, and you expect the large increase, just as you expect another increase the following week, and further increases in the weeks after that until initial claims subside and people go back to work, at which point the continued claims number will begin to fall. And, unlike the media simpletons, you are not shocked by that which you expected.

Second, let's look at historical highs, lows and trends for perspective, as we have done in the last two posts. The most recent continued claims total of 1.8 million as of the week ended Mar. 14 was the first reading above the 1.8 million mark since April 14 of last year. Things weren't so bad back then, right? So even though the last reading was up by 101,000 from the prior week, that shouldn't alarm us - historically, 1.8 million continued claims is a very low level.

How low? Well, in October of last year, continued claims were the lowest since 1973 at just under 1.65 million - pretty darn close to where we are today. The average from that low to the most recent reading is right at 1.7 million. So a trend between 1.65 million and 1.8 million is about as low as we're gonna get.

And if we go back to the early days of this data series, we find that the record low was 988,000 in May 1969. (The U.S. population was more than a third smaller, too - remember, denominators matter.)

Now let's look at highs. The record for continued claims was 6.635 million in May 2009, just after the end of the Great Recession. (By the way, for anyone unfamiliar with what I'm referring to when I reference the Great Recession, it's a name commonly given the most recent recession, from 2008-09, which was brought on by the housing collapse and subsequent financial crisis.)  Next highest was just after the 1981-82 recession, in November 1982, at about 4.7 million. And the third highest total followed the 1973-75 recession, at about 4.64 million in May 1975. No other recession since the claims data was first recorded in 1967 has seen continued claims reach 4 million.

What's significant about these highs and lows? First - and this is very important in terms of mitigating your risk of the numbers scaring you, so pay close attention - these spikes resulted from the three longest recessions in the history of the data. The Great Recession lasted 18 months, the longest downturn since the Great Depression of the 1930s. The recessions of 1973-75 and 1981-82 lasted 16 months each. All three of these recessions were followed by slow recoveries. The next-longest recession since WWII lasted 11 months, and the average duration of recessions since WWII, excluding the three noted above, has been nine months.

Generally speaking, shorter recessions see shorter peaks in continued claims. However, it does not hold true that the shorter the recession, the lower the peak in continued claims. So if we see a peak above 4 million, as I strongly believe we will, do NOT assume that means we're in for a 16-month downturn. The 1980 recession lasted only six months, yet continued claims peaked shortly after it ended at slightly more than 3.9 million. I do not anticipate a prolonged downturn or a slow recovery, for reasons I have explained in previous posts.

Second, denominators matter (okay, so I'm sounding like a skipping record - younger readers will need to google that reference). So let's divide each of the three most severe peaks by the Civilian Labor Force at the time.

To recap, the peak of the Great Recession was 6.635 million continued claims. As a percent of the Civilian Labor Force at that time, continued claims were 4.29%. At the 1982 peak, continued claims were 4.19% of the labor force. And at the 1975 peak, they were 4.90% of the labor force - higher than in 1982 or 2009.

So, to exceed those levels on a percentage of the labor force basis, we'd have to see continued claims of more than 8 million - exceeding the most recent reading by more than 6 million. And yet, even if that happens, it's not the most significant indicator. Why?

Because the duration of unemployment matters most. Weeks unemployed peaked in July 2011 at 40.7. (That was 25 months after the recession ended.) The recovery from that recession was the slowest ever, due in part to fiscal policy and the causal factors of the recession. That record was far and away higher than any previous duration of unemployment. After the 1982 recession, weeks unemployed peaked at about 17. No other recession even came close. And as I've noted, I don't expect the duration of unemployment to reach the "worst-since" levels we've seen previously, for a variety of fundamental reasons.

Finally, the peak in continued claims always occurs after a recession officially ends, as is the case with the unemployment rate. So when that peak arrives, the worst is over.

The consensus forecast for the initial jobless claims release scheduled for Thursday, April 2 (for the week ended March 28) is around 3.5 million, which would exceed last week's record level by about 200,000, and set a new record. I'll go out on a limb and say that'll probably be the highest level we'll see, though there will still be new filings each week well in excess of the 210,000 or so trend that we were seeing before the pandemic response shut things down. So we probably will see a peak above 8 million continued claims, and the peak will probably occur within a few weeks. But that still doesn't foretell a prolonged downturn.

The duration of unemployment this time should be short. If we look at the model data from the University of Washington's Institute for Health Metrics and Evaluation (the same model that has been referenced by Drs. Fauci and Birx - and more on models in a subsequent post), we see that in most states, the curve flattens within a couple of months. The modelers and experts seem to agree that this virus is likely to be seasonal. So if we assume that things will open back up within a couple of months, either on a rolling basis state-by-state based on curve flattening projections, or on a wider basis, then the duration of unemployment is likely to peak at a few weeks over and above the levels we were seeing before the virus hit.

A caveat about that. Those pre-pandemic levels were already at about 21 weeks, which was above the peaks that followed every downturn before the Great Recession. These levels were unusual given how strong the labor market was through February, and resulted from the government's response to the Great Recession. As part of that response, the amount of time someone could draw unemployment was extended to account for the extremely slow job growth at the beginning of the recovery.

However, that amount of time was never reduced in many large states when things normalized, and thus more recently was well beyond the time it would have taken to find a job in the prevailing labor market. So many people had a disincentive to work, if they could live off their unemployment checks. As a result, if the duration of unemployment resulting solely from the pandemic is about 11 to 16 weeks - as the curve data suggest - adding that to the "base" levels we saw in February could result in a reported duration of unemployment of more than 30 weeks, which would be historically pretty high. And would, of course, be distorted by the media to try to scare you.

One last point. My numbers could be wrong in terms of the level of the peak in claims or in the unemployment rate. Those peaks could be much higher. It doesn't matter this time - what's critical is the duration of unemployment. As noted before, there will (and has already been) a sharp, cliff-like spike in the unemployment metrics, but every indication from the medical data is that the duration will not be as long as seen in many recessions.

Remember that when the media tries to scare you with things like a recent St. Louis Fed blog post (which is already being sensationalized) that estimated that 47 million jobs would be lost in the second quarter and the unemployment rate could hit 32%, a record high. Even that blog post acknowledged that it is not the level but the duration of unemployment that is important in this environment. And their estimate also assumes that no part of the economy opens back up until after Q2, which contradicts the data regarding when the curve flattens throughout the U.S.

Stay calm, stay safe and stay sane.