Birth Death Model Outpaced By Business Failures

“Our conclusion is that if small firms aren’t captured well in the advance GDP data, the economy may be growing less quickly than suggested by the recent official data.”

-Jan Hatzius, Goldman Sachs economist


This certainly comes as no surprise to us:

“The U.S. government is having a tough time guesstimating how many small businesses failed in this recession, casting doubt on the reliability of vital data on employment and economic growth.

The formula the U.S. Labor Department designed to help it deliver timely, thorough monthly employment reports broke down in the heat of the financial crisis, miscounting the number of jobs by an estimated 824,000 in the year through March.

The most likely culprit is the so-called “birth-death” model, which the Labor Department uses to estimate how many companies were created or destroyed.

That model appears to have misjudged how many companies went out of business during the recession, meaning the labor market was even weaker than initially thought when President Barack Obama took office in January. More recent figures may still be underestimating job losses now, but it will be many months before the Labor Department is certain . . .

Government data has difficulty gauging the health of smaller firms because there are simply too many of them, leaving officials to rely on surveys and models that are hit and miss.”

Let’s put some numbers to this: In 2008, 43,546 businesses filed for bankruptcy; Even more are filing in 2009 — Q2 of 2009, the most recent data available, saw 16,014  bankruptcy filings — on pace to run 33% more than the prior year.

BLS simply does not catch all of these failures in the monthly NFP reports.

The next BLS B/D adjustment will be in February 2010, when they qill like add another 800,000 to a million lost jobs to the prior years . . .


Recession shows shortcomings in U.S. economic data
Thu Nov 19, 2009
Emily Kaiser and Nancy Waitz

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