Last Updated Jul 8, 2010 10:20 AM EDT
Congress Declines to Extend Unemployment Benefits
The latest dip in weekly claims reflects a combination of modestly improving labor market conditions and a drop in the number of people re-applying for unemployment insurance. Congress failed to extend these benefits last week, and they expired for more than a million people on July 1st. The unadjusted data was significantly worse, as July is a tough month to capture on a seasonally-adjusted basis. Look for more second- and third-time applicants to drop out of the pool over the next several weeks, as the full effects of the failure to extend insurance benefits takes hold.
We are also likely to see some increase in applications for more expensive Social Security and welfare programs, as the uninsured scramble to make ends meet in an economy which fails to deliver much in terms of jobs. Also, the number of workers who give up entirely and drop out of the labor force is likely to rise, since they were forced to keep looking for jobs in order to qualify for unemployment benefits.
In addition, I wouldn't be surprised to see credit delinquencies reverse course and rise again with the end of unemployment insurance payments. Even the most conservative of economists thought that extensions to unemployment insurance should have been phased out, rather than cut abruptly, given the economic fallout such a shift implied for the rest of the economy.
Lone Bright Spot
The only bright spot might be the small cadre of highly-skilled workers (including engineers) who refused to take lower-paying jobs and opted to extend their unemployment insurance instead. The number of those workers is still extremely small, relative to the total. A larger obstacle for skilled workers is the cost of relocating, as many people can't afford to take losses on the homes they have and sell them to accept employment elsewhere.
The Bottom Line
The wounds from the recession are still deep and will take some time to heal. Even then, we are likely to see some long-lasting scars. Rehabbing an economy that went to such extraordinary excesses is no easy feat, and fraught with a series of setbacks.
Diane Swonk, chief economist at Mesirow Financial, talks to CBS MoneyWatch twice a week about the day's top economic news and developments. Her responses are edited for clarity and length.