Global Economic Watch


Recent Posts



  • Atlanta Fed President on Growth and Jobs, and 'Misrepresentations' of the Impact of Small Firms

    We find that a lot of the talk about small businesses as job creators in the U.S.--especially during political campaigns--isn't quite backed up by the data. The same may be true elsewhere. Atlanta Fed President Dennis Lockhart was in Spain to speak with students at the Instituto de Empresas . The focus of his speech was on growth and jobs, and he spent some time tamping down heightened expectations for smaller faster younger firms--or "gazellas"--to drive growth in the U.S. or Europe: We found that the role of young firms in job creation is easily overstated. For instance, the claim is often made that new firms alone account for all net job creation. This is true in what you might call an accounting sense. That is, the number of jobs created by new firms about matches or exceeds the net number of jobs created by all firms. But this fact ignores the reality that established firms that are growing create many more jobs each year than do new firms. It's just that established firms that are downsizing are responsible for destroying a lot of jobs as well. New firms haven't been around long enough to downsize. In fact, as a group, young firms between one and five years old destroy more jobs than they create because of the high failure rate. Moreover, we found that many small firms are not established with an objective to grow and add employees. The landscape of small, young businesses is heavily populated with "mom-and-pop" businesses. They play an important social role, but are not a major source of jobs beyond the initial number of employees at establishment. In our investigation we then looked at the argument that it is the relatively small subset of small, young, fast-growing firms—the gazelles—that drive job creation. It's clear that gazelles do contribute significantly, but it's the growth dimension, not the age or size dimension, that matters most. That is to say, fast-growing mature firms also account for a lot of job creation. And heavy emphasis on technology and bioscience industries—so popular among economic development professionals—may also be misplaced. High-growth firms emerge in a number of industries, some decidedly low tech. All in all, it's not so obvious that the likely source of high-growth firms can be identified. The recent recession significantly constrained the growth opportunities of companies. By one definition of fast growth, there are about a third fewer fast-growing firms in the U.S. economy now compared to the mid-2000s, and they are adding about half as many jobs compared to the earlier rate. It may seem like an obvious point, but one still worth emphasizing. Innovation and entrepreneurial activity are most likely to achieve maximum impact in terms of job creation in a context of general economic growth. Read the full speech here .
  • North Dakota Top Scorer in Gallup's Job Creation Index for Fourth Year in a Row

    The Midwest was the highest scoring region for Gallup 's Job Creation Index for 2012, but the index showed improvement across the nation. Only four states--Arizona, Delaware, Mississippi, and West Virginia--had lower survey scores than 2011. Gallup's Job Creation Index is based on employee reports of their own company's hiring activity, so we don't want to go overboard on what the data tells us her, but the trending is positive. Here is a look at Gallup's interactive map: On average in Gallup Daily tracking from January through December 2012, 43% of North Dakota workers said their company was hiring workers and expanding the size of its workforce, while 9% said their employer was letting workers go and reducing the size of its workforce, for a +34 Job Creation Index score. This is easily the best among the 50 states and the District of Columbia, and is 16 percentage points above the national average of +18. North Dakota has ranked first four years in a row. Full results by state for 2012 can be found on page 2. South Dakota, Nebraska, Iowa, Indiana, Oklahoma, Utah, and the District of Columbia have also all ranked among the top states in hiring in 2011 and 2012. Maine is new to the bottom 10 states in 2012, compared with 2011, largely because its +10 Job Creation Index score was unchanged while most states showed improvement. Connecticut, Idaho, New Jersey, Oregon, New Mexico, New York, and California are the seven states that made a repeat appearance among the bottom 10 in 2012. Read the full report here .
  • Testing Okun's Law--Are Jobs and Growth Still Linked?

    In 1962, Arthur Okun wrote that "changes in the level of economic activity are associated with shifts in the composition of employment and output by industry." But the nature of the economic recovery in the U.S. (as slow as it may seem) has made reconsidering Okun's Law popular (if not necessary). In a post for VoxEU , Laurence Ball , Daniel Leigh , and Prakash Loungani examine whether jobs and output can now be decoupled: Figure 1 shows peak-to-trough declines in output for a group of OECD countries during the Great Recession against the change in unemployment over the same period. The correlation is essentially zero. In the language of economics textbooks, Figure 1 suggests a breakdown of Okun’s Law, the short-run negative relationship between output and unemployment reported by Arthur Okun in 1962. Figure 1. The Great Recession: Peak-to-trough output and unemployment changes (simple scatter plot) We believe the casual impression that "Okun’s broken" is misleading (Ball, Leigh and Loungani 2013). Two adjustments are needed to restore Okun’s Law (as shown in Figure 2): The first adjustment is to account for differences in the duration of the recessions; For the set of recessions shown in these charts, the period from peak to trough ranges from two quarters to seven quarters. As we show in our paper, Okun’s Law implies a relationship between the changes in unemployment and output only if we control for this factor. The second adjustment accounts for the fact that, historically, the coefficient in Okun’s Law varies across countries. Figure 2. The Great Recession: Peak-to-trough output and unemployment changes (with adjustments for duration of recessions and country-specific Okun coefficients) Read the full post here .
  • Signs of Recovery in American Manufacturing

    Earlier this week, Brookings gathered business leaders and policy makers to discuss "fiscal challenges, U.S. manufacturing and government performance." Bruce Katz , VP of the Brookings Metropolitan Policy Program , addressed the good and the bad of American manufacturing. Katz pointed out the manufacturing sector lost the most jobs during the great recession. When you lose manufacturing jobs, other jobs, like design and engineering jobs, leave the country as well. But some manufacturing jobs have come back (see Katz's handout on jobs recovered, by sector, here ). And Katz sees some trends that suggest continuing recovery in American manufacturing is possible. The key to continued growth, Katz says, is collaboration: You can watch other excerpts from the Brookings panel discussion on American manufacturing here .
  • Kauffman Foundation: Worker Hiring and Churn Rate Higher at Young Firms

    According to a new study from the Kauffman Foundation , new businesses are showing "signs of recovery" in worker turnover. It stands to reason, as the report shows, that startups have a greater percentage of new hires, but the finding that worker churn rates seem to be recovering only at young firms is telling, and may suggest, as the report points out, a slackening in economic dynamism. From the report: Figure 1 shows the rates of job creation and destruction by broad firm age groups from 1998:2 to 2011:1 for a selection of twenty-eight states. These twenty-eight states account for 56 percent of total U.S. nonfarm employment in the second quarter of 1998, according to the BLS’s Current Employment Statistics. Fluctuating around 20 percent, job creation rates for the youngest businesses—those that are zero to one year old—are much higher than for more mature businesses.14 Job creation rates for the youngest firms are twice those in the firm age range of two to ten years and four times as large as the rates for mature businesses (eleven-plus years old). Though less dramatic than the differences in job creation rates, job destruction rates also are higher for the youngest businesses than for more mature businesses. In comparing the job creation and destruction rates across firm age groups illustrated in Figure 1, it is evident that young firms have the largest net job creation rate (the difference between job creation and destruction). For the youngest firms, the net job creation rate in booms exceeds 10 percent and, even in the recent recession, exceeded 6 percent. In contrast, the net job creation rates for more mature businesses are positive in booms and negative in recessions, with a slightly higher average for businesses between two to ten years old than for those eleven years old or older. The finding that the highest net job creation rates are from young firms is consistent with the evidence in Haltiwanger, Jarmin, and Miranda (2010) from the BDS. Job creation rates are procyclical, that is, they rise during economic expansions for all firm age groups, while job destruction rates are countercyclical. Though these patterns are not surprising, the cyclical patterns differ sharply across the 2001 and 2007/09 recessions. While there was a notable increase in the job destruction rate for young businesses in the 2001 recession, the job creation rate for these businesses did not change much. In contrast, the 2007/09 recession exhibited a more pronounced decline in job creation for the youngest businesses, along with an accompanying increase in job destruction. The implication is that the 2007/09 recession hit the youngest businesses much harder than the 2001 recession did. Though the youngest businesses were hit hard in the 2007/09 recession, they are the group that has had the most robust recovery, with their job creation rate growing from 0.18 to 0.23 between 2009 and 2011. Read Job Creation, Worker Churning, and Wages at Young Businesses here .
  • OECD Internet Economy Outlook 2012: Internet Firms Driving Job Creation

    Who are the job creators? Well, Google and Amazon seem to have been key hiring firms, according to a new OECD report. Those two giants led the way for their sector, as Internet firms increased employment by 29% last year. Overall, the top 250 ICT firms in OECD nations " boosted employment by 4% in 2010 and 6% in 2011." Here is a look at the trend: The hiring has been largely in the service sector, with manufacturing of Internet technologies trailing. And continued growth, according to the OECD, will depend on content development: Digital content is arguably the most important driver of consumer Internet adoption, with related revenues growing rapidly across all sectors. Advertising represents the biggest online market in absolute terms, followed by computer and video games, online music and film and video. In 2010, games led global consumer demand, accounting for an estimated 39% of digital revenues. According to the International Federation of the Phonographic Industry (IFPI), digital music worldwide accounted for 29% of recording companies’ revenues – more than four times that of the combined online revenues from the book, film and newspaper industries, despite these other industries being much larger overall. The last two years have seen significant growth in devices capable of accessing online digital content. Sources of content are also expanding, with social networking and new video and audio services helping to drive ICT industry growth and create new business models. Indeed, the switch to digital technologies has forced businesses in a growing list of sectors to rethink their business models and adapt to survive. Bandwidth usage continues to increase each year, with video and entertainment services demanding an increasing share on both fixed and mobile platforms. Sandvine reports that real-time entertainment applications have overtaken peer-to-peer (P2P) as primary drivers of network capacity in North America, accounting for 58% of peak traffic and almost 65% of peak downstream traffic in 2012. The streaming video service Netflix alone reached a peak of 32.9% of all US downstream traffic in the same year. Devices such as set-top boxes and gaming consoles are also helping to drive this shift to online entertainment. Cisco predicts that IP traffic will grow fourfold between 2010 and 2015 at an annual growth rate of 32%. Sandvine also reports that the majority of realtime entertainment traffic (54.3%) is going to streaming video and audio and that 15.6% of this traffic is viewed on mobile devices and tablets being used from home via Wi-Fi. Read an excerpt of the report here . The full report is available online through the OECD iLibrary here .
  • Infographic: Job Creators

    GOOD and MTV are teaming up to produce some useful infographics aimed at younger voters. The latest is on jobs, and it puts together a lot of top-line information. Like where new jobs are being created most rapidly: And the increasing importance of education: Does the inforgraphic provide more data and context than an economic paper? No. But it does as well as many short articles out today--if not better. And if it allows for visual learners to pick up a better understanding of the issues, then we're all for it. Take a look here .
  • Nouriel Roubini Lowers Expectations for U.S. Economic Growth

    At Project Syndicate , Nouriel Roubini warns us not to look at improved home and auto sales or an uptick in manufacturing and come to the conclusion that economic recovery will pick up. He gives four reasons we should expect growth to slow down even more over the next year: First, growth in the second quarter has decelerated from a mediocre 1.8% in January-March, as job creation – averaging 70,000 a month – fell sharply. Second, expectations of the “fiscal cliff” – automatic tax increases and spending cuts set for the end of this year – will keep spending and growth lower through the second half of 2012. So will uncertainty about who will be President in 2013; about tax rates and spending levels; about the threat of another government shutdown over the debt ceiling; and about the risk of another sovereign rating downgrade should political gridlock continue to block a plan for medium-term fiscal consolidation. In such conditions, most firms and consumers will be cautious about spending – an option value of waiting – thus further weakening the economy. Third, the fiscal cliff would amount to a 4.5%-of-GDP drag on growth in 2013 if all tax cuts and transfer payments were allowed to expire and draconian spending cuts were triggered. Of course, the drag will be much smaller, as tax increases and spending cuts will be much milder. But, even if the fiscal cliff turns out to be a mild growth bump – a mere 0.5% of GDP – and annual growth at the end of the year is just 1.5%, as seems likely, the fiscal drag will suffice to slow the economy to stall speed: a growth rate of barely 1%. Fourth, private consumption growth in the last few quarters does not reflect growth in real wages (which are actually falling). Rather, growth in disposable income (and thus in consumption) has been sustained since last year by another $1.4 trillion in tax cuts and extended transfer payments, implying another $1.4 trillion of public debt. Unlike the eurozone and the United Kingdom, where a double-dip recession is already under way, owing to front-loaded fiscal austerity, the US has prevented some household deleveraging through even more public-sector releveraging – that is, by stealing some growth from the future. Read American Pie in the Sky here .
  • Partnership for a New American Economy Report on U.S. Losing Ground in Race for Top Talent

    The Partnership for a New American Economy wants us to take a close look at how the U.S. may be falling behind in the recruitment of top talent from around the globe. The Partnership is a the coalition of big names in business and city government,business leaders, like Michael Bloomberg, Steven Ballmer, and Rupert Murdoch. And its recently released report is a scathing criticism of U.S. immigration policy. There is a lot in the report to discuss, but we found the Partnership's call to change policy to encourage more entrepreneurs to set up shop in the U.S. to be particularly provocative. According to the report, the U.S. provides relatively little incentive--or perhaps only disincentive, when put into a global context--for people with new business ideas to come to the U.S. From the report: Innovative programs are emerging to incentivize new groups of highly educated workers to leave their home countries and start companies that attract capital and boost domestic job creation. Chile, the United Kingdom, and Canada have all launched programs targeted at entrepreneurs and investors. Start- Up Chile, for example, offers im- migrants $40,000 in equity-free capital and a one-year visa to start a company on Chilean soil. So far, the program has drawn more than 1,600 applications from 70 countries, with applicants based in the US leading the way. More than 200 foreign start-ups are now up and running thanks to the program, raising $8 million in seed funding from firms in France, Brazil, Argentina, Uruguay, and America.67 Recent developments in the UK show the real push many countries are making to attract the entrepreneurial immigrants so helpful in job creation. In 2008 the UK created a special entrepreneurship visa that allowed founders of companies with £200,000 of investment (about $320,000) to settle in the country for three years. In 2011, however, the UK decided to compete for such high-value immigrants by opening its doors to the most promising, non-EU entrepreneurs still further. Today, the government al- lows some high-potential entrepreneurs funded by venture capital firms, angel investors, or seed groups to come into the country with just £50,000 in funding (about $80,000). Start-up founders who create 10 jobs within three years - or generate £5 million in revenues (about $8 million) - are also put on a more rapid track to gain permanent residency. Such changes are having an impact. In the first year under the revised rules, Paul Barrett, the Economic Migration Policy Advisor for the UK's Immigration and Border Policy Directorate, says applications for the country's entrepreneurship visa program more than doubled. At the same time, the country also created a way for potential entrepreneurs to visit the country to explore starting a business: Such immigrants can now get special six-month prospective entrepreneur visas. "We didn't want to get left behind," Bar- rett said of the motivation be- hind recent initiatives "There's a lot of competition out there now for global talent." Like many countries focused on economic growth, high-talent immigrants - including entrepreneurs and investors - are deemed critical to the country's future success. As Barrett explains it, "Attracting high- skilled immigrants, investors and entrepreneurs - those who will truly grow our economy - that's where the thrust of our recent policies have been." Download the full report here .
  • Small Business Optimism Index Now Tied for Highest Reading Since End of 2007

    Optimism among small business owners continues to edge upward, according to a National Federation of Independent Business survey. The NFIB's Index of Small Business Optimism rose 2 points in April and is now at 94.5. Here's a look at the long term trend: As you can see, the trend since the end of last summer has been relatively positive. The index has now pulled even with where it was in February of 2011--the highest it has been since the end of 2007. Of course, NFIB economists William Dunkelberg and Holly Wade remain anything but optimistic in their assessment. First quarter GDP growth was reported at 2.2 percent, weaker than most observers expected but consistent with the NFIB survey numbers. The Index continues to hold at the higher values of what would be considered recession level readings. Optimism has been unable to break out into expansion mode for years, producing a few false starts with no followthrough. There are hints in the April data that suggest that job creation and consumer spending were better than first reported by the government, so revisions may be positive. The unemployment rate decline was anticipated by the increase in reported hard-to-fill job openings and reported job creation was weaker in April than March, but positive. Job creation was weaker than the survey anticipated, but there will likely be upward revisions to the April figures. Looking at the larger economic picture, there isn't much reason for owners to become optimistic, the stock market is good, but the economy is bifurcated. The big tech, manufacturing and agriculture firms are doing very well as profits are at a record level. But that has not been the case on Main Street. Washington clearly is not going to address our fiscal imbalances and uncertainty is huge, about taxes, health care, new rules to help unions, energy prices, regulations and the election outcome. The Federal Reserve has taken policy into territory for which no maps exist; it's not clear where its policies will take us. Developments in Europe only magnify fears that there is another "adjustment" ahead that will be as disruptive as the one we just went through. Consumer and owner confidence in government policies is at historic lows. Whatever discretionary spending consumers and owners might do is still being deferred where possible. Owners are betting their own money and are looking for better odds before putting money on the table. Most likely, there will be little improvement on Main Street in optimism or hiring and spending this year. Read the full report here .
  • Menzie Chinn on 'Unexpectedly fast net job creation'

    There seems to be fairly wide agreement that we have been witnessing a jobless recovery in the U.S. So it comes as a bit of a surprise to learn, as Menzie Chinn points out at Econbrowser , that private employment growth is outpacing GDP. Chinn shows the growth rate of private employment against GDP in this figure: Chinn: Notice that from 2008Q4 onward, employment growth was below the regression line (i.e., employment was underpredicted), and continued on into the recovery period. The most recent observations have indeed been above the regression line. But there does seem to be a consistent pattern wherein contractions are associated with employment growth below that implied by the relationship that obtains over both upswings and downswings. This suggests to me that we don’t want to look at static relationships (levels on contemporaneous levels, or growth rates on contemporaneous growth rates), but rather dynamic ones. And perhaps ones that allow for different behavior in contractions (after all, GDP business cycles are not symmetric – contractions are shorter than expansion). Read Okun’s Law, the Jobless Recovery, and Unexpectedly Fast Net Job Creation here .
  • Gallup Poll Shows Small Business Owners Intend to Create More Jobs

    More small business owners intend to make new hires over the next year, according to a recently released Wells Fargo/Gallup Small Business Index poll. 22% of small business owners expect to increase the total number of jobs at their businesses, while just 8% expect to decrease the number of jobs. Here's a look at the index trend: From Gallup: The increase in small-business owner hiring intentions over the past year is consistent with the strong performance of Gallup's Job Creation Index in January and the decline in the unemployment rate as measured by Gallup at mid-month. At the same time, small-business owners have often expected to increase hiring in recent years but later reported that they actually eliminated more jobs than they created. So it remains to be seen whether the greater expectations for hiring in the next 12 months will become reality. The preference of small-business owners for hiring temporary, contract, and part-time workers may help explain why Gallup is seeing increasing numbers of people working part time but wanting full-time work even when the unemployment rate is lower. Further, this preference may reflect the continued caution on the part of many small-business owners toward the U.S. economy. Just a year ago, many owners also hoped to significantly increase their hiring in 2011, but their current reports of hiring they did last year indicates that this did not happen. Many small-business owners also continue to say they are having trouble finding qualified employees. This situation could end up hurting a lot more than one in five small businesses if hiring begins in earnest later this year. While small-business owners tend to be agile -- and have demonstrated their ability to adjust to the business cycle as needed to survive -- weak economic conditions have persisted since 2008. Read the full release here . (hat tip Small Business Trends )
  • NFIB Small Business Index Continued to Inch Upward in November

    There was a rise in optimism among small business owners in November, according to a National Federation of Independent Business survey. The NFIB's optimism index rose to 92.1, from 90.2 in October, spurred largely by perceptions among small business owners that labor conditions are improving. Here's a look at the long term trend: While the uptick is certainly a nice change from the end of the summer, when the index was down at 88.1, NFIB economists William Dunkelberg and Holly Wade do not exude optimism in their report. After all, they point out, the index is still 2 points lower than it was at the beginning of the year. The economy is slowly righting itself, dealing with a huge excess supply of assets created in the 2003-2007 boom and the associated debt incurred to create those assets and take consumption to a record high share of GDP (the “party”). The 2000 stock crash left winners with cash and losers with worthless shares of We moved on, winners and losers declared. The housing bubble crash left a different set of assets for us to deal with. Declaring, even finding, winners and losers is a mess, not the least due to government trying to determine the outcomes. Not worthless pieces of paper but millions of houses, apartments, condos and less often discussed, retail stores, strip malls, restaurants and the like and a pile of inventory to get rid of. This process is difficult and protracted. In 2007, 845,000 new firms were formed (displacing 804,000 existing firms). This process went into reverse in 2008. More firms terminated, fewer started, fewer new homes were built, inventory went on sale to raise cash and employment was slashed as the now surplus of firms struggled to survive. Many of these sought loans to “tide them over”, loans that by now would in most instances have gone bad had they been made. The adjustment seems to be about over. Historically high percentages of owners report inventories are in balance, reduced to match anemic consumer spending. However few plan to add to stocks as prospects for improved growth have not been optimistic. Firms have stopped firing workers, employment has adjusted to weaker sales, but hiring new workers remains muted, as sales prospects offer little reason to hire more workers. Most equipment is still working requiring little need to buy new stuff. Still a problem is the number of firms competing for reduced levels of consumer spending, experiencing poor financial performance. There is likely more to come here, more terminations. This will increase sales at the remaining firms and with a boost from modestly improving consumer spending, begin to address the unemployment problem a bit more aggressively. The excess supply of structures will continue to be a drag, but less so. Read the full report here .
  • Kaufman Foundation Report: Small Businesses 'Starting Smaller, Staying Smaller'

    No matter what the prevailing discussion is in Washington, job creation remains perhaps the biggest challenge for policymakers. And many of the most ardent small business supporters argue that their sector is the real engine of job creation in the US. So jump-starting that engine would certainly be welcome. But it may be that small businesses started to change in size before the recession. That is, that they became smaller and had fewer employees. A new Kaufman Foundation report highlights this issue, and makes the case that a boost in small business job creation is highly dependent on the number of small businesses, and not so much on current small businesses hiring more people. Recent Census Bureau research has pointed to one factor that is contributing to this slowdown in job creation—shrinking job creation in startups. As shown in Figure 1, startups created an average of 3.5 percent of total U.S. jobs annually in the 1980s, but in the 2000s contributed only 2.6 percent of total U.S. jobs. While diminished in number, these jobs still were the difference between positive and negative overall net job growth in the United States. Media and academic commentators who bemoan America’s unusually slow rate of job creation after the 2007–2009 recession are missing what we believe is a longer-term trend that began earlier in the decade and might best be called a slow jobs “leak.” In the pages that follow, we draw upon newly available data to track businesses over time and dig deeper into the health of U.S. startups. We examine young companies’ size at birth, jobs created, and survival patterns to draw inferences about the health of emerging companies in the United States. The patterns we find among young businesses show that recent U.S. startups are performing much worse than prior cohorts in terms of job creation. Conventional wisdom about job growth tends to focus solely on the jobs that are being created at existing (typically big) companies. But as a wealth of recent research has shown,6 new businesses are vital contributors to a healthy jobs market. Indeed, we know that, until the Great Recession, new firms in the United States generated on average about 3 million new jobs every year. While these firms typically follow a quick up-or-out pattern of success or failure, our analysis highlights for further scrutiny of some additional and, we believe, significant facts about the jobs actually created by new businesses. Read Starting Smaller; Staying Smaller: America’s Slow Leak in Job Creation here .
  • The Listening Room: This American Life on Job Creation

    In her latest post at Economix , Nancy Folbre reminded us about the This American Life episode on job creation. Back in May, the producers at PRI 's TAL put together an hour titled How to Create a Job . They, and their friends from Planet Money , spoke with governors, bureaucrats, job seekers, journalists and economists about who actually has the capacity to create jobs. A couple of months later, the program is as relevant as ever. Take a listen: Click here to listen to select segments.