JOHN HOOD COLUMN: Our economy is always churning

Published 3:11 pm Wednesday, June 26, 2024

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RALEIGH — North Carolina’s private sector lost an eye-popping 414,000 jobs in the most-recent quarter tracked by the U.S. Bureau of Labor Statistics. Are we on the brink of economic cataclysm? Should you buy gold and head for the hills?

John Hood

Nah. There’s no reason to panic. While a modest uptick from the previous quarter, those lost 414,000 jobs don’t represent 414,000 people suddenly out of work. You see, during the same quarter, North Carolina businesses added 496,000 positions — representing a net increase of about 82,000 jobs.
Most government reports, and media coverage of their release, focus on net changes. That’s understandable. Net changes convey important information about the past and relevant data for future planning. If the share of North Carolinians who are jobless and looking for work goes way up, for instance, that may suggest a recession is underway.
What net changes leave out, however, is the amount of churn in our economy. Every year, every quarter, even every month, many jobs are created or destroyed. Many people move in and out of the labor market. Many businesses start, expand, contract, or perish.
A BLS series called Business Employment Dynamics fills in these gaps. There’s a bit of a time lag in the data — the job-loss figures I cited earlier are for the third quarter of 2023, the latest available — but they are essential for understanding how modern economies work.
Here’s another example. During that same quarter, 12,568 business establishments opened their doors across the state and created at least one job, while 14,070 establishments shut down, eliminating at least one job. A bad sign? Not necessarily.
Entrepreneurship is, among other things, a process of testing ideas. Some succeed, creating long-lived firms that generate significant value for consumers, employees, and investors. Most new businesses don’t survive very long, however. That can be disappointing for those who create or benefit from them. For the economy as a whole, however, business failures represent hypotheses tested.
Perhaps, contrary to expectations, putting your sandwich shop at that well-traveled intersection wasn’t really the best use of the property. Or that innovative approach you came up for mortgage lending, discount retail, or chemical engineering proved unnecessary, unpopular, or impossible to manage effectively. That’s information other people can use, including fellow innovators who now know what not to try. It’s an iterative process. Over time, competitive markets channel our scarce time and resources into more-productive uses. Living standards rise.
Economist Thomas Sowell, himself a native North Carolinian, once offered a pithy explanation of how this works. “To those who run businesses, profits are obviously desirable and losses deplorable,” he wrote in his textbook Basic Economics. “But economics is not business administration. From the standpoint of the economy as a whole, and from the standpoint of the central concern of economics — the allocation of scarce resources which have alternative uses — profits and losses play equally important roles in maintaining and advancing the standards of living of the population as a whole.”
Now, to say this process serves the public interest is not to deny the painful consequences of churn. Those whose enterprises fail, or whose skills become outdated, deserve compassion and assistance. Community colleges and other public and private institutions play key roles in helping the dislocated find new ways to support themselves and their families.
Generally speaking, the marquee statistics show little dramatic change in North Carolina’s economy. Over the most-recent 12-month period, our gross domestic product expanded by 3.2% in real terms, a growth rate indistinguishable from national and regional averages. Our headline unemployment rate in April (3.5%) was little changed from the 3.3% of April 2023. Over the same period, North Carolina employers added net new jobs at an average rate of 1.2%. That’s solid but hardly spectacular (job creation was higher in Georgia, South Carolina, and Virginia but lower in Tennessee).
Just remember that net changes can be differences between quite-large sums. Lots of people lost or gained jobs. Our economy is always churning.

John Hood is a John Locke Foundation board member.