Despite the slowing economy, applications to form new businesses in the US grew by 1.2% in October, compared to the previous month. That’s not unusual because new business start-ups have soared since 2020 when the Covid pandemic raised its ugly head, as you can see in the chart below.
Part of what drives new business formation is when there are lots of new ideas and new options for growth, said Aaron Terrazas, the chief economist at Glassdoor, a popular jobs board site. However, “Not all businesses are born equal,” he said. “Some new businesses are born of opportunity, while some new businesses are born of desperation.”
He pointed out that there was a boom in business formations during the depth of the Great Recession (2008-2009), as many people who lost their jobs were starting their own businesses just to have a job. During the Covid pandemic, new business applications surged, with a September 2021 study finding that most were concentrated in the e-commerce boom, as well as “gig” workers setting up LLCs to protect themselves from personal liability.
Another factor, which may also indicate economic resilience, is people have moved up their applications because they want to get their business loans in now before interest rates go up any higher, said Erica Groshen, an economist at Cornell University.
The data on new business applications come from the “employer identification numbers” filed with the IRS which are used to identify business entities.
Starting A Business During An Economic Downturn
Despite the recent economic slowdown, some good ideas will come out of it—as seen with the founding of household-name companies like Uber and Airbnb, which were born to disrupt the stodgy industries they were in and came about during the Great Recession. “You do see the seeds of the next kind of boom begin to germinate during these periods of economic crisis,” said Terrazas.
At the same time, startup costs are going to be lower, and entrepreneurs will have an easier time attracting employees. “But the challenge, of course, is that then your customers may not be in a position to buy whatever it is you’re selling,” said Groshen. “So, it depends on what you’re selling.”
It is not a surprise that new business applications soared in 2020 and beyond. Due to COVOD–19 lockdowns and closures, many businesses closed permanently or were shut down for months. People who worked for these businesses had to find other work, and many opted to start their own businesses.
What is surprising is the fact that more new businesses have continued to spring up long after the Covid lockdowns ended and most businesses reopened their doors. As you can see above, applications for new businesses continue at levels never seen before 2020.
In 2019, 3.5 million applications were filed. One year later, in 2020, Americans filed paperwork to start 4.4 million businesses. New business applications soared another 23% in 2021 to reach a staggering 5.4 million.
Retail continues to be the industry with the most applications. This has been the case since the surge of applications started in 2020. Professional services come in second, consistent with its position since the pandemic began.
Online shopping, in particular, gained immense popularity amid local restrictions on businesses and gatherings during the COVID-19 spikes and has continued to grow sales since then, according to Census Bureau quarterly retail e-commerce reports.
Interestingly, the pandemic’s startup surge looked different than one might have predicted. Entrepreneurship growth was not concentrated in traditionally dynamic hubs such as Silicon Valley or the downtowns of other big coastal cities. Rather this growth seems to have happened much more in “majority minority” neighborhoods.
The spike in new business applications in recent years has been led by Black and Hispanic counties, as you can see in the chart below. This is great news for these communities!
In closing it is critical to not lose this momentum and allow this progress to backslide. Minority-owned businesses have higher business fail rates than white-owned businesses and face heightened barriers in growing their businesses. They also see greater struggles in reaching the “mature” stage.
In order to ensure that in the coming years we do not see a spike in failures of new minority-owned businesses, it will be critical to address the structural inequities that hold minorities back from growing and scaling their ventures.
The bottom line for me is: It is inevitable that some of these new minority-owned businesses will fail, but I predict far more will survive and flourish, especially as we emerge from the recent economic slowdown – as the latest estimate of 3Q GDP (+2.6% annualized) suggests. My best wishes to all of them!
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