July 31, 2014 / 6:40 PM / 5 years ago

Fewer new firms formed, hurting U.S. growth -Fed paper

July 31 (Reuters) - A drop in new U.S. business formation that began in 2007 has slowed job growth and could have a lasting negative effect on economic growth, according to research published Thursday by the Chicago Federal Reserve Bank.

With fewer new firms opening their doors, the researchers found, the U.S. economy may have generated some 1.7 million fewer jobs through 2011. Just 410,000 firms were created in 2011, down from 562,000 in 2006. So far, the rate of new business formation shows little sign of recovery, they said.

“Whatever its cause, the decline of entry is likely to have reduced the demand for labor since 2007, perhaps by hindering productivity growth, and hence contributed to the size and especially the persistence of the economic contraction that started then,” wrote Chicago Fed economists Francois Gourio and Todd Messer, and Fed Board economist Michael Siemer, in the September edition of the Chicago Fed Letter.

Economists both inside and outside the Federal Reserve are eager to pinpoint whether U.S. economic growth is experiencing a permanent downshift that could dampen output for years to come. Some have warned that if economic growth potential is now lower than in years past, the Fed may need to alter its calculations as it pursue appropriate monetary policy.

The rate of new firm formation may hold important clues to this question, the researchers argued, because while not all young businesses survive, the ones that do tend to grow quite rapidly. The decline in new firm creation since 2007 bodes poorly for future job and economic growth, they said.

While new firm creation could yet rise back to historical norms, they said, “as of 2011 there was little hint of such a rebound, let alone an overshoot.” They also found that the firms that were created during the recession were no faster growing than the average.

“It will be important in the next few years to use business dynamics statistics to measure whether entry rates recover and how firms that did enter during the recession are doing,” they wrote. (Reporting by Ann Saphir; editing by Andrew Hay)

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