June 13, 2011

USAT’s Scott Patterson Covers the Neglected Topic of Business Formation, Not Particularly Well

usatodayTo say that the statistics concerning new business formation during the past few years haven’t been very good would be a major understatement.

USA Today’s Scott Patterson deserves some credit for even looking at the topic. It is tailor-made for neglect by the rest of the establishment press. When government policies lean towards lower taxation and regulation, policies left-leaning journalists tend to oppose, net business formations generally grow, and they’d rather not report it. In the high-tax, high-regulation environments they favor, net business formation slows considerably — and again, they’d rather not report it.

On the plus side, Patterson surfaced the biggest reason — “a huge amount of uncertainty” — why net small business formation is lagging. That said, the USA Today reporter showed that he (and his editors, if they actually looked at his submission) could use a bit of a tutorial on what some of the numbers published by Uncle Sam’s Bureau of Labor Statistics really mean. For example, he took “establishments less than one year old” to mean the same thing as, in his words, “new businesses started up.” Additionally, to get his arms around the entire picture, Patterson should have brought out the other side of the business formation equation, namely business deaths.

Here are several paragraphs from Patterson’s Sunday evening report, with a headline that doesn’t tie in very well to the underlying topic:

Small businesses, crucial to growth, face challenges

Entrepreneurs have started up the fewest new U.S. businesses in more than a decade, according to government figures that could spell more bad news for job creation.

Through the 12 months ended in March of last year, 505,473 new businesses started up in the U.S., according to the latest data available from the Bureau of Labor Statistics. That’s the weakest growth since the bureau started tracking the data in the early 1990s. It’s down sharply from the record 667,341 new businesses added in the 12 months that ended in March 2006.

Weak start-up growth has dire implications for jobs because small and midsize businesses have driven employment gains in the U.S. for years. Between the recession that ended in late 2001 and the start of the most recent recession in late 2007, businesses that employed fewer than 500 workers added nearly 7 million employees, according to data collected by payroll provider ADP, which tracks employment trends.

Meanwhile, businesses that employed 500 or more cut nearly a million positions over the same period, often because they sent jobs overseas. Smaller companies — think local restaurants, gas stations and mom-and-pop grocery stores — are far less likely to send jobs abroad. That’s why they are crucial to the recovery, economists say.

… Small-business employment growth has been waning in recent months. In May, businesses with less than 50 employees added 27,000 jobs, according to ADP. While that’s an improvement over a gain of 14,000 a year ago, it’s down sharply from the 84,000 jobs added in April and advances of more than 100,000 in December and January.

A huge concern for small businesses, says the NFIB’s Dunkelberg, is lack of clarity about what will happen in the next year in Washington. With another round of elections coming up and rancorous debate on Capitol Hill, businesses are unsure about what policies will be enacted by the government.

“There’s just a huge amount of uncertainty. And when you’re uncertain, you don’t make bets,” he says.

Below, readers will see that Patterson took a BLS table clearly labeled “establishments less than one year old” and presented it as “new businesses started up”:


The stats are not the same. The counts of “establishments less than one year old” above are as of specific points in time (i.e., March of every year), while “new businesses started up” is a measurement which encompasses a period of time (e.g., a quarter or calendar year). Many start-up businesses never get past the one-year mark.

What follows is the information Patterson should have used. It comes from BLS’s quarterly “Business Employment Dynamics” release, the latest of which was published on May 3, and goes through September of last year. The data is taken from the report’s final table, “Private sector establishment births and deaths, seasonally adjusted” (the published table goes back to 2000; only 2004-2010 is presented because of space limitations; “difference” calculations were done by me):


As seen above, net small business formation grew nicely from 2003 to 2005, and stayed positive until the end of 2007. But net job formation remained quite positive until the first quarter of 2008. The rest of the 2008 and 2009 were awful, though 2009′s final quarter showed hope for improvement 2010. But 2010′s formation numbers and jobs generated are about the same as 2009. So if net formations and jobs go positive in 2010, they probably won’t do so by very much.

If the so-called “recovery” occurring right now were as robust as it should be, net business formation and the jobs created from them should have gone positive almost immediately after the recession ended in June 2009.

The data presented generally support Scott Patterson’s main points. Next time, he ought to use the right data.

Cross-posted at NewsBusters.org.


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