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Business Applications as Economic Indicators

Working Paper Number CES-21-09
JOSE ASTURIAS, EMIN DINLERSOZ, JOHN HALTIWANGER, AND REBECCA HUTCHINSON

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”). The analysis indicates that growth in applications for likely employers significantly leads total nonfarm employment growth and has a positive correlation with it, whereas growth in all applications and applications for likely non employers have weaker positive correlations and shorter leads. Furthermore, growth in applications for likely employers leads growth in nearly all of the monthly Principal Federal Economic Indicators (PFEI) included in this study. Impulse response functions from vector autoregression analysis indicate that growth of both total nonfarm employment and advance monthly sales in retail and food services have positive and long-lasting responses to innovations in growth of applications for likely employers. Overall, applications for likely employers appear to be 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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