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

Thursday, July 31, 2008 | 08:00 AM

"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

The 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 . . .

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