CREAT: Census Research Exploration and Analysis Tool

Business Applications as a Leading Economic Indicator?

May 2021

Working Paper Number:

CES-21-09R

Abstract

How are applications to start new businesses related to aggregate economic activity? This paper explores the properties of three monthly business application series from the U.S. Census Bureau's Business Formation Statistics as economic indicators: all business applications, business applications that are relatively likely to turn into new employer businesses ('likely employers'), and the residual series -- business applications that have a relatively low rate of becoming employers ('likely non-employers'). Growth in applications for likely employers significantly leads total nonfarm employment growth and has a strong positive correlation with it. Furthermore, growth in applications for likely employers leads growth in most of the monthly Principal Federal Economic Indicators (PFEIs). Motivated by our findings, we estimate a dynamic factor model (DFM) to forecast nonfarm employment growth over a 12-month period using the PFEIs and the likely employers series. The latter improves the model's forecast, especially in the years following the turning points of the Great Recession and the COVID-19 pandemic. Overall, applications for likely employers are a strong leading indicator of monthly PFEIs and aggregate economic activity, whereas applications for likely non-employers provide early information about changes in increasingly prevalent self-employment activity in the U.S. economy.

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Internal Revenue Service, Bureau of Labor Statistics, Center for Economic Studies, National Bureau of Economic Research, Office of Management and Budget, Bureau of Economic Analysis, Energy Information Administration, University of Maryland, Federal Reserve Bank, Census Bureau Longitudinal Business Database, Longitudinal Business Database, Department of Economics, Employer Identification Numbers, National Employer Survey, Social Security, VAR, Census Bureau Disclosure Review Board, Business Formation Statistics

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