The Entrepreneurship Puzzle: Are Business Applications Converting to Actual Launches?

By SBE Council at 24 October, 2023, 2:48 pm

by Raymond J. Keating – 

Entrepreneurship is vital to U.S. innovation, competitiveness, and economic, income and employment growth. Given this reality, let’s try to put together what’s happening of late on the entrepreneurship front.

To do so, we’re going to look at the latest numbers from three different sources.

New Business Applications Up

First, there are business applications numbers from the U.S. Census Bureau. The latest report for September 2023 shows strong growth in new business applications (i.e., “business applications for tax IDs as indicated by applications for an Employer Identification Number (EIN) through filings of the IRS Form SS-4”), which came in at a seasonally adjusted 472,961. That was up by 1.3 percent versus August. Also, within these numbers, high-propensity business applications (i.e., applications most likely to turn into businesses with employees) came in at 159,105. That was up by 6.1 percent compared to August. As noted in the following charts, monthly business applications – both total and high-propensity – have jumped up dramatically from pre-pandemic levels, including showing resumption of solid growth since mid-2022.

This, of course, has been welcome news. But what about the conversion of these applications into actual businesses? Unfortunately, Census Bureau employer firms and nonemployer data have a long lag. The latest data currently is from 2020. So, what else can we examine?

Establishment Births Up

The Bureau of Labor Statistics publishes a “Business Employment Dynamics” report, with the latest covering the fourth quarter of 2022. That report includes quarterly births of new establishments. Now, it must be remembered that establishments include different locations for the same business. However, at the same time, new establishments will capture new firms as well, including one-person businesses. Unfortunately, there’s no real way to pull this apart, that is, until new firms data catches up (again, data still stuck in 2020). Nonetheless, there obviously is real value in seeing the trend in quarterly new establishments numbers.

In 2022, establishment births (seasonally adjusted) in the fourth quarter registered 341,000. That followed on 346,000 in the third quarter, 359,000 in the second quarter, and 347,000 in the first quarter. In 2021, the numbers again were above 300,000 in each quarter (308,000 in the first quarter, 352,000 in the second quarter, 359,000 in the third quarter, and 379,000 in the fourth quarter).

These two years – that is, 2021 and 2022 – are the only years in which the quarterly levels ever topped 300,000. And this dataset goes back to 1993.

Interestingly, the latter half of the pandemic year of 2020 saw high levels of establishment births as well. The first quarter 2020 came in at 278,000, which at that point was a quarterly high for the data. The second quarter, which captured the fuller impact of the pandemic, saw births drop to 228,000 (deaths jumped to all-time high of 326,000 as well – more on deaths shortly). But third quarter births jumped back to 277,000 and then to 287,000 in the fourth quarter.

As a comparison, looking at pre-2020 quarterly numbers from 2015 to 2019, for example, establishment births ranged between 233,000 to 269,000. So, we definitely see a strong link between the jump up in new business applications and an increase in establishment births.

By the way, establishment deaths also have risen, particularly from the second quarter of 2021 (225,000) through the first quarter of 2022 (253,000), which is the latest period with deaths data. The pickup in deaths is expected with the rise in births, as entrepreneurship is an endeavor rich with risk and uncertainty, and failure is not unusual. The key is to see robust births, with deaths lagging well behind births, as has been the case post-pandemic.

Persisting Concerns in Self-Employment Numbers

Now, let’s turn to the last dataset, and that would be the BLS self-employment numbers. The BLS self-employment numbers are broken into two categories – incorporated and unincorporated. These numbers are important because they capture fulltime entrepreneurs, that is, individuals whose fulltime job is business ownership, whether that business has employees or not.

Since the incorporated monthly data is not seasonally adjusted, let’s look at the combined annual averages for self-employed (that is, incorporated plus unincorporated).  Total self-employed hit a high of 16.15 million in 2007. It subsequently declined with the Great Recession to 14.58 million in 2011. Subsequent growth was sluggish and uneven, getting back to 15.72 million in 2019. During the pandemic year, self-employment dropped to 15.53 million. However, growth was fairly strong in 2021 and 2022 – hitting 16.07 million in 2021 and 16.53 million, a new annual high, in 2022.

Hitting a new annual high in 2022 was welcome, but it also reminds us that self-employment – again, fulltime entrepreneurship by this measure – has essentially been flat for a decade-and-a-half. At the same time, the U.S. population expanded by 11 percent.

Finally, we can look at what’s been happening on the self-employment front through the first nine months of 2023 compared to the same time last year. The monthly average for self-employment from January to September 2023 registered 16.38 million, and that’s actually down from the 16.47 million covering the same period in 2022.

So, there’s what we can piece together of the recent entrepreneurship puzzle. There’s very real reasons for being pleased and hopeful given the applications and births data, while the self-employment numbers lend some caution, or even concern, to the tale. Obviously, the hope is that those increases in applications and establishments will lead to increased fulltime entrepreneurship.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist and The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist.