Record continuing jobless claims threatens more foreclosures, deflation

Yet another ignominious distinction for the U.S. labor market: Continuing unemployment claims surged 122,000 to a record 5.56 million, the U.S. Labor Department announced Thursday, as more Americans found it hard to find comparable employment amid the nation's worst economic downturn since the 1981-82 Reagan recession.

Meanwhile, initial jobless claims increased 8,000 to 652,000 for the week ending March 2. Initial jobless claims have now been above 600,000 for two months.

Economists surveyed by Bloomberg News had expected this week's initial jobless claims to total 650,000. The four-week moving average dipped 1,000 to 649,000.

U.S. job market: Under stress

Economists note that the high continuing claims level reflects labor market stress and the long amount of time it's taking the unemployed to find comparable employment. Few companies are filling vacancies, many major corporations have announced large layoffs and even temporary work assignments are declining.

Those layoffs -- and the specter of additional home mortgage defaults and consequent mortgage-backed securities defaults -- are a major source of the toxic asset problem plaguing banks, financial institutions and other market participants who provide credit. Economist Peter Dawson told Daily Finance Thursday, there will be no turnaround in the home mortgage foreclosure rate until job losses end and net job creation begins.

"The large job losses and level of continuing claims are serving as a foreclosure highway that leads directly to increased toxic assets," Dawson said. "Without job creation, U.S. economic health is impossible."

Slack demand creates deflation risk

In addition, Dawson said the housing price declines created by large inventories and the high unemployment rate, etc., are posing another risk to the U.S. economy: deflation. "We will be fortunate to have roughly flat prices this year and not deflation. There's real price pressure out there, and it will hurt corporate operations if it continues for several quarters," Dawson said. "The biggest threat to the economy right now is deflation, not inflation."

The record continuing claims total is the telltale stat, many economists agree: It reflects very soft labor market conditions. Keep in mind many economists believe the continuing claims statistic actually under-represents the number of long-term jobless citizens. If a laid-off person stops looking for work because they can't find suitable employment or any work, they're no longer counted as unemployed. Many economists say if this category was included, the continuing claims statistic would be 10-15 percent higher.

For investors, given the high level of continuing claims and the current pace of job losses, the best-case scenario for the U.S. economy would be a recovery in revenue and earnings in late Q3 or early Q4 2009; a rising continuing claims level would push that revenue and earnings recovery into Q1 2010.

Economic Analysis: The U.S. economy needs to create about five million jobs to return to full employment, so it's full speed ahead on all fronts (fiscal and monetary) regarding stimulus. While in normal times back-to-back $1 trillion federal budget deficits would be enough to sour economists and market analysts almost universally, the reverse is the case today, due to the pronounced recession. The large outlays are seen as one critical source of demand for an economy that needs all the demand pressure it can get from the public sector, given the slump in business investment, international trade and consumer spending.

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