Submitted by Tyler Durden on 10/15/2015 14:53 -0400
One of the main reasons why the BLS has been massively overestimating job creation ever since great financial crisis, is due to the well-known birth-death adjustment, aka the CES Net Birth/Death Model, which quantitatively is shown on the chart below, has resulted in the “addition” of some 5.3 million jobs, that don’t actually exist, but are merely modeled by the BLS which continues to assume the same new business creation/destruction dynamics that existed before the crisis.
The is a big problem with this core assumption, which has follow through effects not only for domestic fiscal policy, but also monetary policy (and explains why despite a 5.1% unemployment, there is zero wage growth, thus keeping the Fed pushing the ZIRP accelerator pedal years later), for the simple reason that as of this moment it is dead wrong.
Here is what Gallup CEO, Jim Clifton, wrote several months ago looking at the trends in new business creation and destruction in the US.
We are behind in starting new firms per capita, and this is our single most serious economic problem. Yet it seems like a secret. You never see it mentioned in the media, nor hear from a politician that, for the first time in 35 years, American business deaths now outnumber business births.
The U.S. Census Bureau reports that the total number of new business startups and business closures per year — the birth and death rates of American companies — have crossed for the first time since the measurement began. I am referring to employer businesses, those with one or more employees, the real engines of economic growth. Four hundred thousand new businesses are being born annually nationwide, while 470,000 per year are dying.
As Clifton adds “you may not have seen this graph before” and for good reason: it destroys the most sacred assumptions held by the BLS’ cubicled actuaries and various tenured economists locked up in their ivory towers: namely that the number of US business startups outnumbers the number of failures. This is no longer true!
Here is what the above chart shows: until 2008, startups outpaced business failures by about 100,000 per year. But in the past six years, that number suddenly turned upside down. There has been an underground earthquake. As you read this, we are at minus 70,000 in terms of business survival. The data are very slow coming out of the U.S. Department of Census, via the Small Business Administration, so it lags real time by two years.
Gallup adds that business startups outpaced business failures by about 100,000 per year until 2008. But in the past six years, that number suddenly reversed, and the net number of U.S. startups versus closures is minus 70,000.
So what is causing this historic shift in US business creation.
The are various answers, the most obvious of which is that the US never actually left the 2007 depression, whose effects continue to be papered over, literally, with some $13 trillion in global central bank liquidity, which have made life for the richest 0.1% better than ever at the expense of the middle class.
But the biggest culprit is also the one which over the past 7 years has become America’s latest credit bubble, last check rising to $1.3 trillion in debt: student loans.
This is what Gallup finds when looking at the future of collapsing U.S. new business formation:
… the country can’t look to people coming out of college to reverse this trend because too many of them are strapped by student loan debt. Results of the 2015 Gallup-Purdue Index — a study of more than 30,000 college graduates in the U.S. — provide a worrisome picture of the relationship between student loan debt and the likelihood of graduates starting their own businesses.
Among those who graduated between 2006 and 2015, 63% left college with some amount of student loan debt. Of those, 19% say they have delayed starting a business because of their loan debt. That percentage rises to 25% for graduates who left with more than $25,000 in student loan debt. According to the National Center for Education Statistics, nearly 16.9 million bachelor’s degrees were conferred in the U.S. over the past 10 years — a time frame that mirrors Gallup-Purdue Index analysis of recent graduates between 2006 and 2015.
Putting these sad statistics into numbers, Gallup calculates that over 2 million graduates have said they have delayed starting a business because of their student loan debt. If even a quarter of them had done so, we would quickly recoup our average surplus of 120,000 new businesses annually.
It would also mean that the BLS’s Birth/Death model would once again be accurate. However, as a result of record student debt, which is increasing at an accelerating pace of over $100 billion per quarter, not only is the birth/death adjustment wrong, but its “contribution” to the total number of jobs should be inverted.
Which, incidentally, would reflect far more accurately the woeful state of the US labor market.
Finally, we know we are spot on right with our assessment that student debt has become the primary culprit holding back the jobs (and businesses) recovery, because two days ago none other than Ben Bernanke said Bthat “student debt no threat to U.S. financial system.”
And that is all you need to know why the biggest threat to the US financial system is none other than student debt (after the Federal Reserve itself, of course).
Some of us know it’s all lies. Some know and don’t care. Most don’t know and don’t care.
We can’t do a thing about it.
It’s only student debt preventing new business formation? Well then, let’s forgive all those student loans and see what happens!
Hint: NOTHING will happen, even if you wiped out all student loans overnight. It takes CAPITAL for capitalism, and no one is lending. Bank officer: Let’s see, I could take all this newly-printed money and loan it to someone who’s never run a business, to start a new company in the middle of a recession, and make it long enough to pay me back when 2/3 of all new businesses fail in the first two years – or I could park it at the Fed to earn the overnight funds rate with zero risk of loss. What do I do, what do I do…..
Then consider all the rules, regs, fees and requirements from “business licenses” to “waste disposal fees” that businesses have to cough up (before making a profit, naturally) and tell me which new grads have a clue on how to set it up, insure it, finance it, run it, account for it to the Feds/states/locals! We are stuck until real change shows up and sticks – and my bet is on the bureaucracy, to block, forever.
Let’s start a new business where they are valued, encouraged and assisted instead of penalized, overcharged and stifled. Maybe in … Singapore? Chile? Got any ideas?
Well actually not bad for an economy that has had two legs of it’s support destroyed by government (manufacturing and mining).
I must be a simpleton because I have a hard time understanding why it is so hard to figure out how many people are working and how many are not. Like other businesses we report Federal tax withholding for ALL of our employees just like every other company in the country. It is electronic and in real time. How tough can it possibly be to add up weekly, monthly and etc. Why do we need birth death formula adjustments? X amount of people are born everyday and X amount of people die every day, count them. X amount of people file for unemployment everyday and X amount of people run out of benefits, count them.
I think in this day and age of modern electronic monitoring and reporting this should be a simple accurate exercise that would not require seasonal adjustments and birth/death adjustments. What am I missing here?
The small city I live in is dying. The two most common signs in the front windows of the downtown shops are ‘for lease’ or ‘going out of business’. The newly elected female mayor jacked the property taxes from 34.5 to 45.75 mill rate in one shot. She said it was for new “projects”, like a gazillion dollar waste treatment plant expansion for a population that has been steadily decreasing for 15 years. The other “projects” are very nice raises for the municipal ‘worker’s’ union, the police union and the teacher’s union members…. you know, those who helped get her ass elected.
In my opinion (And I don’t know much, mind you)……If all the debt in the country was magically gone tomorrow, this nation would still be screwed. We have a self-destroying system and no one will ever change it. Debt relief would only put off the inevitable, just as the addition of massive debt has.
Peaceout….TPTB don’t want to use up-to-date electronic data; they wouldn’t be able to fudge and adjust the numbers. I’m not kidding.
For employment data, they use the Birth/Death Model, Household Survey, and Establishment Survey.
Instead of this BS, they could use Social Security payments by individuals or W2’s.
Peace out , you’re not a simpleton you’re just a typical Meathead. So don’t be so hard on yourself.You ever watch Meathead on All in The Family ? One of my favorite shows growing up.Peace Meathead.
Cutting government debt will require cutting back or eliminating government agencies and departments. This will cause massive layoffs and ever more people entering the private sector jobs market, a job market that can’t sustain itself now without the added pressure of millions of ex-government drones entering. The government drones that can’t find private sector jobs will now need free shit so they will join the free shit army and apply for their share of the free shit. A cycle starts that can never sustain itself and so it goes…………………
I wrote a business proposal up, had a firm grasp of the financials, its in my field, and I’m the sort who can get it done.
Space, equipment, methods, logistics, marketing, check check check.
Just can’t get financing, and I can’t afford to go out on a limb with 100k of student loans on my neck.
So, I’m reduced to applying for grant money, and starting up my “back-up” small business.
Photography. I’ve got a masters in fucking chemistry, and I’m relying on my PHOTOGRAPHY to try and generate extra revenue. What the fuck is wrong with this country. Why am I relying on this? Simple, no regs. I can enter the pack without having to kowtow to TPTB and if I fail its because I couldn’t cut it, NOT because some bureaucrat decided to give me a bad time.
Oh, and I fight with my student loan companies every month. They fuck up every month, so my rates on a single loan can double and triple before I get them lined back out again.
Shit is fucked up and bullshit.
These guys are right Peaceout, the gov doesn’t want to reflect reality, if they even know what that is.
Whether you agree about student loans being the major factor, it sure is enlightening to see that “death cross” in about Q3 ’07 when business creation went South. I sure as hell felt it in my company, and business volume has been a shadow of its former self ever since. What recovery?
Peace out come out and PLAY you pussy.
Gallup throwing softballs to keep the aware distracted.
1. “Birth/Death” does NOT mean population, it is strictly business w/employees start/end.
2. Between the time of my economics classes in the early ’90s, and the paper I wrote for my Business Law class in 2005, the Small Business Association (quietly) presented different stats. When Clinton entered office small business accounted for 75% of all new non-government jobs. The “crisis” didn’t start until 2007, but that stat magically (and without explanation) changed from 75% to 45%. Since the “crisis” tens of thousands of pages of new regulations on small-to-mid sized business has been enacted. PLUS the bleed out of the likes of Walmart, McDs, GE, Boeing, GM continually offshoring their SUPPLIERS occurred. Anyone other than me think that maybe the 45% was generous?
3. The “college debt” has kept this baby afloat. If not for “college debt” the likes of GM, Dell & Apple would NOT be selling the numbers of foreign produced widgets that they do. Yes, it has pulled demand forward, and I do believe that we are finally seeing the real effects of that truth.
4. In our “wages,” according to the Census Bureau and the BLS, is included our employer-paid for health insurance AND government employees. One of the VERY first things the Demoncrats and Obama did upon his 2008 coronation was to gift federal employees HUGE raises and INCREASED benefits. ALL “gains” reported are skewed by these facts. Skewed hard. Just like the way we are taking it in the rear end.
@TPC, enjoy the photography income while it lasts. I get the feeling that Americans obsession with themselves and their offspring is going to come up against the reality of not being able to afford to eat soon enough. Although the ability of the clueless to continue blowing themselves has amazed me thus far, I’m sure that won’t change until the day China quits shipping anything to our shores.
It is disgusting that so many of our clueless and misled youth still believe the myth of STEM degrees being a ticket to riches. For cripe’s sake, NASA laid off thousands of rocket scientists when we shipped our space program to Russia. Which, by the way, we give Russia BILLIONS to take payloads to the International Space Station.
Of course with what passes for “science” now, do we really need scientists?
Faulty data in , equals faulty data out. It is really that simple, yet none of the so-called “experts” seem to think this is a problem. Every “scientific” board in this country (FDA, USDA, CDC, climatoligists, etc) is basing rules, regulations and mandates on “peer reviews” and NOT actual data. (sidenote, this is EXACTLY how we’re told to slather toxic chemicals on our skin to protect from skin cancer, statins have been pushed and saturated fats, not to mention “raw” milk, have been demonized)
I feel pity for those that are true believers, like the hub’s nephew that just went into debt $200,000 plus his $50,000 in savings to buy a condo. And the fatasses that can’t lose a pound because the recommended/mandated diet is starving both their brains and their bodies of the nutrition needed to just remain in the average range of human IQs.
Party like its 1999 folks. The real Y2K hasn’t hit us yet, but damned if I can’t see it barreling down on us.