What Does the 45% Increase in Bankruptcies Say About the Birth/Death Adjustment?

"The climate is turning desperate for small businesses. They are in crisis, and,
as these numbers show, it’s getting worse and worse."

– George
Cloutier, founder of American Management Services

>

98520080718_bankruptciessmallprod_aThe quote above is about the destruction of small businesses in the current economic environment.

This is especially relevant in light of tomorrow’s Employment Situation Report.The consensus is for -72,000. ADP, which has reverted back to worthlessness the past 7 months, was plus 9,000.

Small businesses were the justifications for the Birth/Death model, which we have discussed ad nauseum.

The original criticism was that the BLS Establishment Survey was not picking up this engine of job creation — those firms with less than 100 employees.

Over the past 3 years, we’ve been focusing a lot on the "Birth" portion of the B/D index. BLS uses new state incorporation filings in order to hypothesize new small business formation. We have argued their emphasis on this has artificially created NFP data that is far better than the reality it purports to represent.

So here’s my question for those so inclined to consider such things:
Why is the BLS B/D Model creating more jobs in 2008 than it did in
2007? Why is BLS claiming that the economy is more vibrant, and that
even more new businesses are blossoming this year over last?

What about the "Death" portion?

One would think that something titled Birth/Death might actually look at business deaths, aka bankruptcies, partnership dissolutions, and corporate closures.

Somehow, we have yet to see these demises reflected strongly in the BLS employment data. And that is surprising, given the 45% commercial filings in 2008’s first halof.

Here’s a recent analysis from McClatchy:

"Driven by a sour economy and skittish consumers, U.S. business bankruptcies saw their sharpest quarterly rise in two years, jumping 17 percent in the second quarter of 2008, according to an analysis by McClatchy.

Commercial filings for the first half of 2008 are up 45 percent from last year, as the national climate for commerce continues to deteriorate amid rising energy and food costs, mounting job losses, tighter credit and a reticence among consumers to part with discretionary income.

From April through June, 15,471 U.S. businesses called it quits, according to data from Automated Access to Court Electronic Records, an Oklahoma City bankruptcy management and data company.

States that saw the biggest increase in filings were Delaware, Montana, Oregon, Maryland and Connecticut, suggesting that the economic gloom is spreading beyond large population centers.

It was the 10th straight quarter that business bankruptcy filings have increased. Nearly 29,000 companies filed in the first half of 2008.

Another 60,000 to 90,000 others probably have closed, because roughly two to three businesses fold for every one that files for bankruptcy, said Jack Williams, resident scholar at the American Bankruptcy Institute.

The vast majority of these failed companies are among the nation’s 23 million small businesses, with fewer than 100 employees. Their fortunes have tumbled as the national economic downturn has deepened.

Its about time for the BLS to acknowledge the flaws in this hypothetical adjustment, and return to actually measuring — versus imagining — new job creation . . .

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Related:
BLS BS Exposed: Commercial Bankruptcies Soar
Global Economic Analysis (July 2008)
http://globaleconomicanalysis.blogspot.com/2008/07/bls-bs-exposed-commercial-bankruptcies.html

BLS Data Sources:

BLS Establishment Survey
http://www.bls.gov/ces/

CES Net Birth/Death Model
http://www.bls.gov/web/cesbd.htm

CES Birth/Death Model Frequently Asked Questions
http://www.bls.gov/ces/cesbdqa.htm

Historical Net Birth/Death Adjustments
http://www.bls.gov/ces/cesbdhst.htm

Accounting for Business Births & Deaths in CES
Jurgen Kropf, Sharon Strifas, Monica Traetow
U.S. Bureau of Labor Statistics, March 2002
http://www.bls.gov/ore/pdf/st020090.pdf

Source:
Commercial bankruptcies soar, reflecting widening economic woes
Tony Pugh
McClatchy Newspapers, July 18, 2008
http://www.mcclatchydc.com/227/story/44717.html

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What's been said:

Discussions found on the web:
  1. wnsrfr commented on Jul 31

    When you are a professional 45 years and higher and you are laid-off or squeezed-out of your job, your best option is to start a small consultancy.

    So, business start-ups can also be another metric for measuring unemployment levels!

    How’s that for a catch-22?

  2. Vermont Trader commented on Jul 31

    Let’s see here

    XOM missed.

    GDP missed.

    MA missed

    reality bites.

  3. Vermont Trader commented on Jul 31

    continuing claims highest in 10 years..

  4. Renting in Mass commented on Jul 31

    When the new administration starts in January, the first thing they should do is explain how bogus all of the economic data is, explain how they are going to change it, and explain to the public that things are much worse than they have been led to believe. Otherwise, when this time bomb explodes, they are going to have a hard time not taking the fall.

  5. Vermont Trader commented on Jul 31

    Revisions
    I guess we are in a reccession.. who would’ve known?

    The annual benchmark revisions showed the U.S. may have slipped into a recession in the last three months of 2007 as consumer spending slowed more than previously estimated and the housing slump worsened. The economy shrank 0.2 percent in the fourth quarter last year, compared with a previously reported 0.6 percent gain.

    First-quarter figures were also revised down to show a 0.9 pace of growth compared with a prior estimate of 1 percent, Commerce said.

  6. 12th Percentile commented on Jul 31

    I love me some spin in the morning. This one is some of the best ever.

    The number of people filing claims for unemployment benefits jumped last week to the highest level in five years, reflecting in large part a new government outreach effort to locate people eligible for benefits.

    Yup. Unemployment is up because the ever so competent Bush adminstration is actively seeking out people to give them benefits. So this is good news! I think the government deserves a pat on the back for this.

  7. Vermont Trader commented on Jul 31

    GDP was below expectations even with a lower deflator than expected. That’s pretty bad.

    And with the stimulus package too..

    sorry for all the posts but this is a big whiff that has caught a lot of people off guard..

  8. CNBC Sucks commented on Jul 31

    Renting in Mass:

    If the Republicans stay in the White House, you haven’t seen bogus yet. We are living in the age of Fiscal and Financial Honesty and Intergrity compared to what you will get with John McCain, so enjoy it now.

  9. brian commented on Jul 31

    Ah, but fear not, Disney’s CEO said there’s been no drop-off in their wedding business so clearly the consumer remains resilient, so say the sages at CNBC.

  10. Greg0658 commented on Jul 31

    I am getting ready to visit an open house for a big print shop competitor (sort of ie: me little)

    got’um a bottle of wine(local), a 3D tissue paper dove ornament(China), a New Years popper and a brass ring

    They built a nice place up outta the ground(in a new TIF), complete with geothermal HVAC.

    I’m envious they went for the brass ring and got it. I hope they can keep it going.

  11. cooler commented on Jul 31

    Excellent info there, BR. Much appreciated.

    As you know, the BLS isn’t the only agency at fault here. Whose the master of their puppet?

    The Fed is also conveniently shutting down important reports (claiming lack of funding – yeah, right) that shed light leading-indicator light on money flows too (foreign investment flows).

    If only flies could talk, I’d bet might right ventricle that Bernanke is not so much worried about the economy, but is worried about the U.S. as an insolvent nation.

    Hide the data, manipulate the data, do whatever it takes and at any cost to cover up the truth that the U.S. is slowly but surely sinking into an insolvent hole. That’s the ONLY WAY to prevent the horrid consequences that would follow.

    They must be hoping against hope that there is a hope to revive fiscal responsibility.

    Yep. A useless stimulus package, a God-awful housing rescue bill, a blank check to the Treasury to bail out Fannie and Freddie, and talk of yet another useless stimulus package.

    What was it that Paulson said???… “If we use a bazooka, we very likely won’t have to use it.” And what happens if you do use it?

    Have you ever seen what happens when a bazooka backfires?

  12. bluestatedon commented on Jul 31

    “When the new administration starts in January, the first thing they should do is explain how bogus all of the economic data is,”

    Renting, I’ve had exactly the same thought. Obama in particular ought to be hammering this theme day and night, because if he’s unlucky enough to get elected the whole rotting edifice is going to come crashing down during his term, and you know that the fine individuals at Fox and the GOP will scream themselves hoarse that everything was fine until the Democrats got control of the White House.

    However, since the “geniuses” running the Obama campaign have demonstrated so far that they are hapless, clueless dopes when it comes to playing with the big boys, there’s no reason to think they’re smart enough to look that far ahead. That’s OK; as a Democrat, I can’t think of anything more fitting than John McCain inheriting Junior’s mess.

  13. John commented on Jul 31

    Sounds like your suggesting the government tell the truth. Somewhere George Orwell is smiling.

  14. Mark E Hoffer commented on Jul 31

    “We hang the petty thieves and appoint the great ones to public office.” — Aesop – (c. 550 B.C.) legendary Greek fabalist

    the funny thing about this: “….An Ant passed by, bearing along with great toil an ear of corn he was taking to the nest…”

    http://www.umass.edu/aesop/content.php?n=0&i=1
    are the ones that see the Ant as some c.1980 ‘Gold Bug'(nice conditioning), as opposed to: a responsible chap, merely “paying it forward”..

  15. Brendan commented on Jul 31

    I have one client (in land development) that has, maybe, ten employees of his own, but literally hundreds of LLCs; a couple for each property he owns. This is of course to mitigate risk and avoid taxes. How are these accounted for in these “small business” numbers. These LLCs each have a small fraction of an employee, are generally replaced one-for-one when sold (or returned to the original owner, bank, etc.), sometimes one-for-two when split and a portion is sold, and rarely disappear altogether. So while these push down the average number of employees per LLC, if one random LLC goes under, it’s bound to be one with real employees numbering greater than the average, not one of these. It seems like these numbers could be horribly misguided without a lot more detailed investigation into what types of businesses are failing, etc.

  16. Dirk van Dijk commented on Jul 31

    Gee, here is an administration that has the VP go over to the CIA to “closely question” analysts who did not come up with the conclusion that Saddam was about to unleash a WMD attack on the U.S. One that asks applicants for non-political carrer prosecutor positions at the Justice Dept. “What is it about George Bush that makes you want to serve him”. Of course the idea that they might lean on a bunch of G-10’s at the BEA to “reexamine” their figures is out of the question!

    In general I heate the idea of having to question the ref’s independence, usually it is the sign of a coach that just has a bad team…but really folks the B?D adjustment has been a running joke. Of course lots of little construction companies are sprouting up in this environment to create 10’s of thousands of uncounted construction jobs every month!

  17. Adam commented on Jul 31

    That map you posted is terrible and misleading. It is not normalized by either population or number of businesses.

  18. Stuart commented on Jul 31

    It says they’re all liars, but we knew that. Just like the mysterious collapsing GDP price index in Q2…. nothing mysterious abut that at all. More lies by people who find it very easy to lie.

  19. ScottB commented on Jul 31

    Barry, thanks again for great postings. I know I’m the only person in the blogosphere who’s not ready to trash the b/d numbers, but I soldier on:

    1. Remember that b/d only impacts preliminary estimates of nonfarm employment. Historical data are based on the universe of individual firms, so no adjustment is necessary.

    2. Even during recessions, new firms come into existence. Actual firm-level data show new firms creating 1.2 to 2 million jobs each quarter in 2001-2002, for example. Births created 1.2 million jobs in 3rd quarter 2007, a good indicator of what a lackluster “recovery” we had and that we were headed downhill.

    3. The net total b/d adjustment for June was 177,000 jobs, not seasonally adjusted. This does NOT mean that BLS thinks that birth firms created 177,000 more jobs than were destroyed by deaths. The other piece of BLS employment estimation–the sample– picks up a large piece of employment losses due to deaths, but not any of the gains due to births. The 177,000 is a residual meant to correct for this discrepancy. With the sample showing (seasonally-adjusted) declines the past six months, it is theoretically picking up a lot of those losses due to deaths.

    4. The large revisions in nonfarm employment in the past two years may be due to sample error, to reporting error (firms send in one number initially but later report a different number on tax returns) and may be due to b/d adjustment. How much each is responsible for, we don’t yet know. I spoke again today with a BLS staffer on their evaluation of b/d. The report should be posted by September. When that report comes out, I may join the chorus, but not yet.

    5. Your final comment, “It’s about time for the BLS to acknowledge the flaws in this hypothetical adjustment, and return to actually measuring — versus imagining — new job creation . . . “, assumes that BLS at one time actually measured new job creation. They never have, because it’s impossible to do in real time. What they can do is measure it historically, which they started doing for the first time in recent years with the Business Employment Dynamics database, and try their best at preliminary estimates.

    And completely off topic (but not for this blog, thank goodness), just caught Sharon Jones and the Dap Kings live last Friday night. Wow!

  20. Pat G. commented on Jul 31

    The SBA gets a very small slice of the Congressional budget. The money is designed to foster the growth in U.S. entrepreneurs who provide 70% of Americans with their jobs. The SBA has used tax payer dollars to fund large U.S. multi-nationals and even a foreign company.

  21. VJ commented on Jul 31

    ScottB,

    Actual firm-level data show new firms creating 1.2 to 2 million jobs each quarter in 2001-2002, for example. Births created 1.2 million jobs in 3rd quarter 2007…

    How ?

    How could millions of NET new jobs have been created at any time during the past seven years, when there are fewer jobs in the national workforce NOW, and every year since, than there were in 2000 ?

    Exactly WHERE are all these imaginary CES Net Birth/Death Model jobs ?

    Civilian Employment-to-Population Ratio
    .

  22. ScottB commented on Aug 1

    VJ:

    I didn’t say net b/d jobs, those were jobs created from births. There were also jobs lost through deaths of similar magnitudes.

    You can view this data at the BLS website at Business Employment Dynamics page. It sorts quarterly employment change by births, deaths, expansions of existing firms, and contractions of existing firms.

  23. VJ commented on Aug 1

    ScottB,

    I didn’t say net b/d jobs

    But that is the entire basis of the national economy. It takes at least 185,000 net new jobs every month just to keep even with the population growth.

    Take a look at the chart. At no point in the past seven years has the ratio even approached where it was in 2000, which means seven years of NEGATIVE private-sector job growth.

    Once again, exactly WHERE are all these MILLIONS of imaginary CES Net Birth/Death Model jobs ? You cannot have fewer jobs in the national workforce now than there were in 2000 AND have millions of net new jobs. There is no possible mathematical possibility for their existence.

    You can view this data at the BLS website at Business Employment Dynamics page.

    I’ve been viewing it for seven years.

    It is a concoction. Gobbledygook.

    It emanates from the same whole cloth as promises of WMD in Iraq, increased income tax revenues from tax rate cuts, and a booming economy & increased jobs from a lower dollar.
    .

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