Goldman Sachs economist Jan Hatzius writes that bad times among small businesses, which are harder for government statisticians to measure than the doings of big businesses, probably means the economy is growing slower than the feds say it is:
We have argued that the weakness of the small business sector may mean that real GDP in the third quarter in fact grew more slowly than the 3.5% “advance” estimate. The reason is that the GDP data may not fully capture the performance of small firms, and specifically the formation and dissolution—i.e. the “birth” and “death”—of small firms …
So what was actual GDP growth in the third quarter? Hatzius uses several different estimation measures and comes up with range from 3% down to 1.5% annualized growth. Over the coming months and years, he figures, the Bureau of Economic Analysis’s official estimate will be ratcheted down into that range. I say let’s keep track of this. And if Hatzius is right, somebody should give him a bonus.
The big-business/small-business disconnect is evident in the divergence between the increasingly positive survey numbers coming out of the Institute of Supply Management (big business) and the still extremely gloomy ones from the National Federation of Independent Business. It was also apparent in the October employment numbers released last week: the establishment survey, which is skewed toward large employers, showed continued improvement (still a loss of 190,000 jobs, if you believe the seasonal adjustments, but the previous two months were revised down and the general trend appears to be improving) while the household survey, which tends to bounce around more month to month but is more likely to include small-business jobs, showed a loss of 589,000 jobs, substantially worse than the monthly losses in the spring and summer.
What’s causing the disconnect? I bet it’s partly just that small businesses didn’t lay off as large a share of their workforce as big businesses did at the beginning of the year, so they’re not seeing as big a profit rebound now and they’re less likely to be in the market for more workers. A lot of small-business owners depend on credit cards for financing, and banks have been awfully stingy with their credit-card customers. Government bailouts and stimulus programs are generally more likely to benefit big business than small. And it could be that uncertainty about health-care legislation and potential changes in personal income taxes weighs much more heavily on small-business owners than the big guys. Got any more ideas?