We noticed an interesting piece of research on U.S. GDP from Goldman Sachs’ Economics team that’s worth highlighting. The team questions whether the official government GDP statistics capture how poorly small businesses (ie, sole proprietorships) are doing. The weakness in small business sentiment is seemingly at odds with the recent 3.5% Q3 GDP reading but may explain why the unemployment rate has continued to steadily increase. Part of the reason for small business weakness is that most don’t have the same access to credit as larger firms and larger firms’ output tends to be better captured in the GDP data. While sole proprietorships tend to be small they collectively account for a nontrivial 17% of the U.S. economy.
The Goldman team uses a couple of different statistical approaches to test their thesis. They use timely data from the National Federation of Independent Business (NFIB) confidence survey, which shows that despite a recent improvement, confidence remains exceptionally weak (in fact two standard deviations below long-run trends). The first model suggests that the NFIB survey is consistent with overall GDP growth of 2.5% to 3.0% — not the 3.5% reported. As well, they find that current NFIB readings are more in line with below-50 readings on the ISM manufacturing index versus the actual reading of 55.7.
The second approach has to do with revisions to the GDP data and their relationship to the NFIB. U.S. GDP goes through many revisions as more, and better, information becomes available with lags — historically preliminary numbers are revised down by almost 0.5 percentage point. This second model suggests that Q3 GDP could be revised down by as much a 1-2 percentage points.
I've been trying to get my hands on the Goldman piece to read it for myself, but as yet have been unable to source it. In any event, it would appear that the decoupling story of large vs. small business is, perhaps, beginning to gain some traction. As a new and semi-permanent era of frugality dawns and consumers increasingly gravitate toward low-cost providers, I maintain this story will continue to percolate.
On a related note, I picked up this tidbit via Alan Abelson's Barron's column on Saturday regarding Friday's release of consumer sentiment:
"Richard Curtin, director of the survey, somewhat ruefully noted that a mere one in 10 consumers polled reported an increase in income, the fewest recorded in data that stretch back to 1946."