New Business Applications Offer Hope for an Entrepreneurial Revival

By at 23 October, 2020, 8:50 am

by Raymond J. Keating-

Economic growth requires robust entrepreneurship. In fact, when you look at underperforming economic growth that ran from 2007 through 2019, one underlying cause was the stagnation or decline in levels of entrepreneurship. And then of course, the COVID-19 pandemic and government-related shutdowns hit in 2020.

How hard has small business been hit this year? According to Opportunity Insights’ “Economic Tracker,” the number of open small businesses across the United States declined by 24.1 percent from January 2020 to the end of September 2020. That’s devastating.

The hope is that we will see a major bounce back in entrepreneurship. Actually, that must be more than a mere hope; it is a requirement if we are to get the U.S. back on a course of strong, consistent economic, income and employment growth.

One set of data that offers hope is the Census Bureau’s business formation statistics. These numbers offer a quarterly and weekly look at Employer Identification Number (EIN) applications across the United States. EIN applications include those looking to start new businesses, and are broken mainly into overall business applications, and high-propensity business applications, which are a subset that have a higher likelihood (based on an assortment of data and assumptions) to turn into businesses with employees.

Business application numbers often are thought of as being forward-looking measures of business startups, for obvious reasons.

What’s striking in the business application numbers for 2020 are the skyrocketing levels after the initial declines when the pandemic hit and shortly thereafter. The following two charts show the number of business applications (seasonally adjusted) for the last five years, running through the third quarter of this year.

Source: Federal Reserve Bank of St. Louis, FRED

Source: Federal Reserve Bank of St. Louis, FRED

Overall business applications were up in the third quarter 2020 by 89 percent compared to the first quarter of this year, for example. In fact, in this dataset going back to 2004, the third quarter 2020 level was by far the highest on record. Similarly, high-propensity business applications were up by 74 percent in the third quarter compared to the first quarter, and the third quarter, again, was the highest on record.

This story continues in the latest weekly data as well. While coming down some from the recent highs, the percent changes in weekly applications compared to the same time last year (weekly numbers are not seasonally adjusted and therefore call for comparisons to the same period in previous years) remain very high. For example, the most recent week’s numbers on business applications – for the week ending October 17 – were up by 44 percent compared to the same week last year, while high-propensity applications were by 29 percent.

Source: Federal Reserve Bank of St. Louis, FRED

Source: Federal Reserve Bank of St. Louis, FRED

While a host of factors come into play when trying to explain these spikes in business applications, obvious factors include, to unknown degrees, increased intentions or expectations for starting up and running one’s own business. In turn, those intentions or expectations can come from being forced to do so – i.e., reluctant entrepreneurs – and/or individuals seeing entrepreneurial opportunities and looking to seize upon them as the economy emerges from the current woes. And that, in turn, can mean side hustles or fulltime efforts.

Among otherwise grim economic and entrepreneurship numbers, these business application statistics present hope for a re-energized economy on the horizon.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.



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