When it comes to the all-important monthly payrolls number which sets the tone for risk over the next month, one of the biggest variables in the BLS’ “estimate” (because all jobs numbers are that: statistical estimates) of US jobs is the monthly birth-death adjustment. What this monthly fudge factor is, in a nutshell, is the BLS’ estimation for how many new businesses are created over the period offset by older “dying” businesses, leading to incremental jobs that are only polled by the BLS with a substantial lag.
Here is how the BLS explains this adjustment:
To account for this net birth/death portion of total employment, BLS uses an estimation procedure with two components: the first component excludes employment losses due to business deaths from sample-based estimation in order to offset the missing employment gains from business births. This is incorporated into the sample-based estimate procedure by simply not reflecting sample units going out of business, but imputing to them the same trend as the other firms in the sample. This step accounts for most of the birth and death employment.
To be sure, in a normal, vibrant, growing and most importantly, entrepreneurial economy, incorporating business creation vs business deaths is a perfectly reasonable statistical adjustment to the actual number of underlying jobs via the BLS business sampling that takes place every month.
There is one problem: the Fed’s centrally-planned abortion of an “economy”, in which the rigged, bubble market is the only leading indicator that everyone focuses on and from which everything else “flows”, is anything but normal.
The latest proof of just how broken the economy has become, and serves as a big flashing red question mark about just how massively overestimated job creation is due to a wildly erroneous birth/death estimator, comes from a research report by the Brookings Institution titled: “The Other Aging of America: The Increasing Dominance of Older Firms.”
From the report’s introduction:
It is no secret that the population in the United States is aging; the product of a baby boom and increased life expectancy. The numbers validate the obvious: the Census Bureau projects that the share of America’s population accounted for by people aged 65 or over will explode from 13 percent in 2010 to more than 20 percent by 2025. The strains this aging of the population will place on the economy and our society are well known.
Here we provide evidence of another type of aging that hasn’t received enough attention yet— the aging of American businesses, or the firm structure of the U.S. economy.
Previously, we documented the decline in entrepreneurship and in overall “business dynamism” in the American economy, finding that this has been occurring across a broad range of sectors, firm sizes, states, and metropolitan areas. Business dynamism is the inherently disruptive, yet productivity-enhancing process of firm and worker churn that reallocates capital and labor to more productive uses. Older firms are less dynamic than younger ones, and their increasing share in the American economy coincides with a three-decade decline in business dynamism.
In this essay we highlight the flip side of an economy that has become less entrepreneurial: the shift of economic activity into mature firms. While this may not come as a surprise to some, we think the sheer magnitude will. Though more research is needed, we think that an American economy that has become less entrepreneurial and more concentrated in mature firms could support the “slow growth” future that many economists have projected.
And the punchline that is most pertinent to the Birth/Death adjustment, the monthly non-farm payroll result, and for the overall US economy itself: “One major factor contributing to an aging private sector is a decline in entrepreneurship, which we measure by new firm formations. Earlier this year, we showed that the rate of new firm formations has been on a secular decline the last three decades.”
Perhaps more striking, our research showed that the decline in new firm formation rates had occurred in every U.S. state and nearly every metropolitan area, in each broad industry group, and in all firm size classes – or the same patterns we have just reported for the share of mature firms. Figure 3 plots annual rates of firm entry and exit between 1978 and 2011. As it shows, the rate of new firm formations fell significantly during this period—occurring because the number of new firms being formed each year (numerator) didn’t keep pace with the growth in the stock of total firms in the economy (denominator). The same was not true of firm exits, which did keep pace with the growth in total firms—allowing the firm failure rate to hold mostly steady before rising in the second half of the last decade.
It’s easy to see why a declining share of new entrants each year would contribute to an older age distribution of firms. Recall that our data are dynamic, so each year represents a new flow of firm formations. In this way, it’s a path-dependent process where declining entrepreneurship directly contributes to the aging of the business sector. Outside of there being radically different firm failure rates that work in the opposite direction (an issue we address later), fewer new firms each year means fewer young firms, which means fewer medium-age firms, and so on.
But as we show next, the rate of firm failures is not homogenous across all segments of the economy. In fact, failure patterns are accelerating the aging of the private sector economy, and we think may be contributing to the decline in entrepreneurship as well.
And visually: “firm entry” is birth; “firm exit” is death:
The underlined sentence above is key because if indeed this declining dynamism is “contributing to the decline in entrepreneurship as well” then the whole premise behind the birth/death adjustment, or rather the “Birth” contribution visualized in practical terms by the dark blue line above (because businesses are still going away at a stable pace and in fact rising as the light blue line in the chart above shows), goes out of the window.
That is not just our observations: the WSJ’s take is comparable:
it has become more difficult for younger companies to survive and compete with the bigger ones. Business failures are more frequent and likely among start-ups, which may account for the fall in business creation after the 1990s. The economy has grown more advantageous for incumbent firms and less helpful for fledgling ones.
The authors argue that younger companies are crucial to attaining a healthier economy as they have had the largest contribution to past “disruptive and thus highly productivity enhancing innovations” across different sectors ranging from airplanes and automobiles to computers and internet search.
“If we want a vibrant, rapidly growing economy in the future, we must find ways to encourage and make room for the startups of the future that will commercialize similarly influential innovations,” said the authors.
Indeed, and sadly, just as the Fed’s artificial capital misallocation has forced companies to invest hundreds of billions into stock buybacks and other non-growth friendly (but very shareholder friendly) activities, so ZIRP has also shifted the balance of power so far to the side of older, less dynamic, less robut companies that the very premise of statistical inference of “entrepreneurship” via the Birth/Death adjustment is worthless.
Or will be once the BLS realizes what the Brookings authors have concluded.
In the meantime, here is the bottom line: since Lehman, or starting in 2009, the Birth/Death adjustment alone has added over 3.5 million jobs. Or rather “jobs”, because these are not actual jobs – these are BLS estimates for how many jobs newly-formed businesses have created based purely on statistical estimations and hypotheses that the US economy in 2014 is as it was in 1960. Which means that the traditional dynamics used behind the Birth and Death adjustment are now merely Dead, and US employment is overestimated by as much as three and a half million jobs!
This also means that any boasts by Obama about “solid US economic growth” under his regime, and that all those jobs lost since Lehman have allegedly since been recovered, are nothing but even more lies.
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