Late Business Cycle Worries – Fewer Workers in Younger FirmsSeptember 5, 2018 “This could be the end of the business cycle” was one daft statement I recall hearing just before the dot-com bubble burst and the recession of 2001 ensued, ending the longest economic expansion that the U.S. had experienced. So far, all economic expansions have come to an end, and fortunately the same can be said about every recession.
How will our current expansion, now approaching its 10th birthday, finally conclude? What will be the factors, black swans, external shocks that create a pull-back in economic output? The most recent Economic and Revenue Forecast from the Oregon Office of Economic Analysis (OEA) states:
“Potential danger lurks around the corner with many forecasters pointing at the confluence of events beginning in 2020. At this time, federal fiscal policy will be a drag on economic growth and monetary policy is expected to have transitioned from accommodative, to neutral, and potentially even restrictive. Should this fully come to pass, a recession is likely to follow. However, this outcome is not a foregone conclusion. Rather, for really the first time this cycle, it is a reasonable, and clear scenario for how this expansion ends. Even so, between now and then, economic growth is expected to be at or above potential.”
It seems like it’s been so long since our last recession, media articles are sprouting up with subjects like, “How to invest for retirement in a downturn.” The August 2018 issue of Housing Magazine’s lead article was titled, “Recession Fears Rising”. Do they miss the recession like an old friend that hasn’t visited in a while? They shouldn’t. One of the hallmarks of this long recovery is that business start-ups have not increased at the level that might be expected. As noted in a recent post from OEA, economist Josh Lehner notes:
“First, new business applications here in Oregon are on the rise. They now exceed the numbers at the peak of the last expansion. The upward trend in the absolute number of new businesses is encouraging, however start-ups are a smaller share of all firms than in the past. These business applications are an imperfect measure. However the good Census data comes with a considerable lag. And the program was revamped not too long ago. New state level data on firm age has not been released in years at this point, so our office is focusing on more timely measures to help gauge recent trends.”
There are some recent data through the second quarter of 2017 that show the number of workers by firm age from the Census Bureau’s Local Employment Dynamics. This data shows those working at the youngest firms are a shrinking share of all employment, and presumably a declining share of total businesses also.
The percent of workers in firms that were a year old or less ranged from about 6.2 to 7.4 percent from 1992 to 2002 in the Rogue Valley. The share declined to a low of 3.2 percent in 2013, only bumping up to 4.3 percent in 2017. The share of workers at firms between one and two years old also declined, falling from 7.1 percent in 2003 to 4.3 percent in 2017. On the other end of the firm-age spectrum, the percent of workers at firms 11 years old and older rose steadily from 63.7 percent in 1992 to a peak of 79.7 percent in 2016, before declining slightly last year.
Is this declining share of employment at the youngest firms a worrisome trend that may reduce longer-run growth potential in the economy? It’s unclear but is worth paying attention to.