According to the prevailing narrative, job growth in the US, where GDP over the past decade has been on par with that in the 1930s, is one of the otherwise brighter economic indicators in a time when much of the economic data such as capital spending, productivity and especially wage growth (so critical for the Fed's future plans) has been a chronic disappointment. Today, for example, headlines blast that the US has enjoyed 80 months of continuous jobs growth with unemployment hitting 4.3% – the lowest since 2001. However, there is more to this "strong" number than meets the untrained eye.
As our friends at Morningside Hill calculate, a full 93% of the new jobs reported since 2008 - 6.3 million out of 6.7 million - and 40% of the jobs in 2016 alone were added through the business birth and death model – a highly controversial model which is not supported by the data. On the contrary, all data on establishment births and deaths point to an ongoing decrease in entrepreneurship.
Here are the details of how over 90% of the jobs created in the past decade were nothing more than a "statistical" adjustment in some BLS model.
The controversial birth death adjustments
In order to account for jobs created or lost by new business formations or bankruptcies each month, the BLS introduced the birth/death adjustment. It started during the Reagan administration as Reagan was complaining that the bureau was undercounting the jobs he created. The birth-death model used to have a terrible name – the “bias adjustment factor.” This adjustment is computed using a model based on probability-based sampling methodology.
The table below shows the number of jobs that were added through birth/death adjustments over the past 17 years and the percentage of jobs added through the birth/death model
Let’s analyze the data.
- Before 2003 few jobs were added through the adjustment, despite the fact that net business formations were much stronger back then (see data below).
- Then, what strikes us as odd, is that according to the BLS in the depths of the 2007-2009 recession, the birth/death adjustment continued to add a lot of jobs – 904,000 jobs were added in 2009 alone. One would assume that in the nadir of the Great Recession when business defaults skyrocketed, the birth and death adjustment would be a net negative and subtract from the overall jobs number instead of adding to it.
- Lastly, it turns out that a full 30% of jobs created since 2010 or 4.5 million out of 15 million jobs were added via the birth/death adjustment. It is also interesting to note that 40% of the jobs added in 2016 came through the adjustment.
The reason the BLS wanted to include this adjustment was a perception that they were undercounting jobs created through new start-up business formations (that were too young and too small to show up in the Establishment Survey). Those start-ups would eventually appear in their data, but with a few months’ lag. Therefore, if there was a steady supply of new start-up businesses and no sudden shifts in the trend, no adjustment would be necessary. Logically, it would only make sense to apply the adjustment if there is a significant increase in the rate of start-up formations, which has not materialized. On the contrary, multiple studies track a consistent decline in new business creation. Literally every study we have found documents the consistently deteriorating entrepreneurial environment in the US.
The following charts trace a clear downward trend in both employment gained from private sector births and the number of business births per year. Notice the suppressed level of births after 2008.
Furthermore, self-employed persons as a percentage of the working age population and the number of jobs created by establishments less than one year old are also declining.
A study by Harvard Business School entitled “Problems unsolved and a nation divided” summarizes the findings of its multi-year long project called “The US competitiveness project.” The study is a “fact-based effort to understand the disappointing performance of the American economy.” We found this project to be well worth the read and have selected the following chart (below to the left) depicting the multi-decade slowdown in new business formation. Further supporting the Harvard study findings, a Brookings Institution paper called “Declining business dynamism in the United States: a look at states and metros” shows that business formations slowed down and business deaths accelerated after the crisis of 2008 (below to the right).
Below to the left we have a chart from the Economic Innovation Group showing the net annual change in the number of US firms. Notice the significant slowdown after 2008, including 3 negative years. This is clearly not captured by the data from the Bureau of Labor Statistics. Below to the right we have a few charts from the Wall Street Journal summarizing some data points that confirm these trends.
With the data on new business formations and deaths in mind let us now go back to the BLS’s official birth / death adjustments. We have charted the net jobs added through the BLS model and ran a linear trend line to see if it captures the deteriorating entrepreneurial environment. In the chart below, the upward-trending line representing net jobs added through the adjustment is in complete dissonance with all the other data.
The Bureau of Labor Statistics (BLS) seems to be alone in its belief that the entrepreneurial environment in the US is improving. We believe that the BLS has been artificially inflating the monthly payroll numbers via the birth and death adjustment. This overstatement is not trivial in nature – the adjustment added 30% of all jobs reported since 2010.
h/t Morningside Hill
from Zero Hedge http://ift.tt/qouXdu
via IFTTT