\n<\/p>\n
Monthly number of new business applications (EIN filings), both overall and those with “high … [+]<\/span> propensity” of becoming employers, 2004-2023.<\/span><\/p>\n <\/fbs-accordion>US Census Bureau, Business Formation Statistics<\/small><\/figcaption><\/figure>\n One of the biggest upside surprises of the pandemic years was an explosion in the number of new businesses being created by Americans. That \u201cstartup surge,\u201d<\/a> as the Economic Innovation Group (EIG) labels it, has persisted past the formal end of the pandemic. As shown in the chart above\u2014from the Census Bureau\u2019s Business Formation Statistics<\/a> (BFS)\u2014the initial spikes upward and downward in the second half of 2020 have since moderated. Yet business creation in the aggregate remains well above pre-Covid levels, a \u201cnew, significantly higher baseline,\u201d according to EIG.<\/p>\n Before proceeding, some definitions:<\/p>\n Let\u2019s start with the basic numbers.<\/p>\n From 2005 through 2016, the average annual number of total business applications was 2.6 million. In no year during that period did the annual total surpass 3 million. Toward the end of that timeframe, as can be seen in the Census BFS chart above, total business applications began to rise. From 2017 through 2019, the average annual number of business applications rose to 3.4 million, a 23% increase. Then, the surge.<\/p>\n In the three-year period from 2020 through 2022\u2014even including a drop in the early pandemic months\u2014<\/em>the average annual number rose to 4.9 million. That represents an 89 percent increase<\/em> compared to the 2005-2016 period<\/strong>.<\/p>\n On its website, the U.S. Chamber of Commerce has a slick interactive map<\/a> using BFS data that includes useful comparison of business applications\u2014and, importantly, projected business formation\u2014by sector. Even though the Construction sector, for example, has had about half the total number of business applications as Retail Trade, it has a slightly higher level of projected business formation.<\/p>\n The reason that Census tracks business formation and projects future business formation is that not every business application will become an actual business, let alone one that has paid employees. The number of \u201chigh propensity\u201d or \u201clikely employer\u201d business applications has also risen well above pre-pandemic levels, albeit at smaller scale.<\/p>\n High propensity, or likely employer, business applications have also risen and remained well above … [+]<\/span> pre-pandemic levels.<\/span><\/p>\n <\/fbs-accordion>Economic Innovation Group, based on Census BFS data.<\/small><\/figcaption><\/figure>\n The monthly average of high-propensity business applications between June 2020 and January 2023 was 36% higher than between July 2004 and May 2020. That\u2019s a lot more employers: 1.2 million more, to be exact, relative to the pre-Covid trend.<\/p>\n The 2022 Business Openings Report<\/a> from Yelp corroborates the overall trends tracked by Census and offers, based on data from its platform, additional insight into the micro-dynamics. According to Yelp, new business openings \u201creached an all-time high\u201d in 2022, \u201clargely driven by new home and local services businesses.\u201d Other types, such as new restaurants, were still lower than pre-pandemic levels. New business openings, per Yelp, were 12% higher in 2022 than in 2019. That\u2019s a more modest increase than shown in Census data, where high-propensity business applications were 28% higher in 2022 than in 2019. But it\u2019s a useful reminder of what the Census data show: applications versus actual business openings<\/em> on Yelp.<\/p>\n That\u2019s the immediate question presented by the entrepreneurship data. And, what explains not merely the spike in 2020 and 2021 but the persistence of the surge through 2021 and 2022?<\/p>\n Various explanations have been put forth. It\u2019s possible that the owners of the millions<\/a> of small businesses that closed in the early months of the pandemic in 2020 started totally new businesses later that year or in 2021. This would basically be \u201creplacement\u201d entrepreneurship. Layoffs in the spring of 2020 may have shoved many toward entrepreneurship. As the Chamber puts it: \u201cMany individuals laid off as a result of pandemic shutdowns turned their ideas and hobbies into a business that could be run from home.\u201d<\/p>\n More broadly, the Chamber posits: \u201cEntrepreneurs solve problems, and when America experienced huge problems in a concentrated time frame during the COVID-19 pandemic, entrepreneurs rose to the occasion. New economic needs and changing consumer preferences created more circumstances for new businesses to start.\u201d This seems true regarding changing consumer preferences, as non-store retailers (read: e-commerce) have dominated the business application increase.<\/p>\n The Yelp data point toward more prosaic but no less insightful explanations. In its data, sectors such as Hotels & Travel, Automotive Services, and Event Services saw lots of new business openings. E-commerce businesses may have driven business creation in 2020 and 2021, but new business creation in 2022, at least according to Yelp, was driven by everyone\u2019s desire to get back to those things we missed during the pandemic.<\/p>\n We also know that venture capital investments into startups hit all-time highs<\/a> in 2021 and early 2022. While the Census BFS data don\u2019t allow us to qualitatively distinguish VC-backed startups from other types of businesses, it does break out business applications from corporations. Those also spiked in 2020 and have remained at an elevated level, though they\u2019ve fallen in recent months back toward pre-pandemic trend. Some researchers have used the fact of a business being a corporation as a mark of quality and economic impact, so an increase in corporation formations could be positive. Interestingly, however, the spike in high-propensity business applications has been mostly driven<\/a> by \u201cother\u201d applications, not<\/em> those from corporations.<\/p>\n (Here\u2019s another question for contemplation, by the way: why were high-propensity business applications (including those by corporations) so high between 2005 and 2007? They were a much larger share of overall business applications than in recent years. One answer is the housing bubble, but that wouldn\u2019t necessarily solve the higher share puzzle.)<\/p>\n Another way of putting the \u201cwhy\u201d question is through a geographic lens. It\u2019s one thing to look at sectors and sub-sectors; the surge in non-store retailers would strike most people as completely unsurprising. But take Mississippi, which has experienced a huge spike in business applications. In 2019, according to the EIG analysis, the state ranked 22nd in likely employer business applications per capita; in 2022, it ranked 7th. The Chamber highlights Hinds County, the state\u2019s most populous and where the state capital Jackson is located. Hinds had the most business applications (of all types) in Mississippi. So let\u2019s refine our why question: why did so many more people in Hinds County, Mississippi, file new business applications compared to 2019?<\/p>\n (According to the Yelp data, Home Services and Local Services drove new business openings in Mississippi.)<\/p>\n The state-level data from Census and analyzed by EIG, the Chamber, and others provides a good way to explore some of the nuances of the business application surge. While every state experienced an increase in business applications (total and from likely employers) from 2019 to 2022, the surge has been far from even. In some states, business applications in 2022 were 10-20% higher than in 2019, a respectable increase. In others, the difference was much larger: South Carolina, for example, saw a 51% increase in likely employer business applications. (It should be noted, however, that in Yelp\u2019s report, seven states saw fewer new business openings in 2022 than in 2019.)<\/p>\n If we cross-reference the Census BFS data with other Census data, the state-level picture gets murkier. Take Mississippi, again. According to the Chamber, Mississippi ranked 9th in the country in 2022 in business applications per capita. Iowa, by contrast, ranked 50th. Yet Iowa can boast a higher number of projected business formations than Mississippi because it has a higher rate<\/em> of business applications becoming employer businesses. Just because a state experienced a surge in business applications doesn\u2019t mean it\u2019s the new entrepreneurial frontier.<\/p>\n A comparison with the Kauffman Indicators of Entrepreneurship<\/a>, also based on Census data, provides useful nuance into thinking about both the macroeconomic impact of the business application surge and how it may play out differently across the country. Take the top five states in business applications per capita in 2022: Wyoming, Delaware, Florida, Georgia, and the District of Columbia. Let\u2019s remove Wyoming and Delaware because, as EIG observes, they \u201chave long been preferred states for business incorporation\u201d so the high growth rates there may not tell us much about potential economic impact or local context. The next states up are Colorado and Nevada. If we look at these five states\u2019 data on other entrepreneurship indicators, we see some differences. Let\u2019s look at just Florida as an example.<\/p>\n Thus, Florida has a high rate of actual business creation and jobs immediately generated therefrom, but many of those business won\u2019t survive (relative to other states) and, compared to others, a lower share will become employer businesses. Similar discrepancies are seen in other states.<\/p>\n According to some, yes. EIG, for example, says \u201cthe durability of the surge suggests that it is capturing a true renaissance in entrepreneurial activity across the United States.\u201d Its analysis helpfully scans research on the utility of business applications as an indicator and what other datasets show about changes in the business landscape. Their conclusion: \u201cthe available evidence suggests that these trends [in business applications] are indicative of genuine entrepreneurial activity.\u201d<\/p>\n John Dearie, of the Center for American Entrepreneurship<\/a>, is more skeptical. In a recent interview, Dearie reminds<\/a> us that, prior to the pandemic, new business creation in the United States was in \u201cprecipitous decline.\u201d The average number of employer firms created each year had stalled and rates of entrepreneurship had dramatically decelerated. Regarding the pandemic surge, Dearie said his \u201cinstincts tell me that we haven\u2019t seen enough to declare that the kind of entrepreneurship America needs\u2014disruptive, innovation-driven, productivity- and growth-driving entrepreneurship\u2014has really turned the corner.\u201d In fact, Dearie is \u201csomewhat skeptical about the longer-term significance of the spike\u201d because of the sectoral composition of new businesses. Many e-commerce businesses don\u2019t necessarily fall into the \u201cdisruptive, innovation-driven\u201d category.<\/p>\n Some of the data certainly support Dearie\u2019s points. A surge in automotive repair shops may not scream entrepreneurial resurgence to those looking for \u201cdisruptive\u201d business creation. The large share of business applications from those that are unlikely<\/em> to be employers also weighs in his favor. At the same time, however, we know that a large share of employer firms each year transition from nonemployer status. That\u2019s why the Census Bureau projections business formation: some of those non-high propensity business applications will become employers, too.<\/p>\n And what about all that venture funding? One can certainly quibble that the wisdom of VCs shouldn\u2019t necessarily be equated with \u201cproductivity- and growth-driving entrepreneurship\u201d\u2014witness the billions in crypto venture funding that has effectively gone into an incinerator\u2014but it should indicate something, right? In the last three years, for example, about $30 billion each year has been invested in biotech companies through VC deals. Surely some of that is \u201cinnovation-driven\u201d?<\/p>\n EIG\u2019s perspective that the pandemic surge in business applications marks a \u201crenaissance\u201d of \u201cgenuine\u201d entrepreneurship is also persuasive. Certainly the persistence through 2022 of high levels of business applications from likely employers demonstrates that something is happening beyond just the short-term effects of the pandemic. Yet we also know that, prior to Covid-19, some of what contributing to the long-term fall in business creation were factors such as changing demographics. The U.S. population is growing slowly and getting older; that long-term trend has not reversed.<\/p>\n What\u2019s your vote? A new, permanently higher level of entrepreneurship? Or, a temporary blip that will sooner or later subside?<\/p>\n<\/div>\n\n
The Facts on Business Creation<\/h2>\n
Why Is It Happening?<\/h2>\n
New Entrepreneurial Hotspots?<\/h2>\n
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Is Business Creation Permanently Higher?<\/h2>\n