New businesses play a critical role in driving job creation and productivity growth in the U.S. economy. Business applications, a leading indicator of business formation reported through the Census Bureau's Business Formation Statistics, have increased significantly over the past three years compared to any period since 2004, when this series began. . Notably, nearly 16 million new business applications have been recorded since the inauguration of the Biden-Harris administration, representing an average monthly application flow of approximately 85% compared to the period from 2004 to January 2021. It means that it has increased.
Does this increase in claims reflect a surge in economic activity with net new job creation or simply a recovery from widespread business closures during the pandemic? Some people question the submission of a business application for this purpose. Increase in small business and gig employment. Each of these factors can affect the behavior of business applications without affecting job growth. In this blog, we evaluate each of these alternative explanations by examining additional sources of business statistics. Our findings are consistent with the continued and accelerated pace of business formation and economic activity that is expected to drive robust job creation.
Is it just gig work or strategic business formation for tax purposes?
Not all applications to start a new business are related to future employment growth. Some applications may be filed by gig workers who have newly chosen to formally associate their workforce with a business, or who are filing business applications to realize the tax benefits of the temporary federal business tax policy implemented during the pandemic. Promoted by individuals who have. However, the recent proliferation of business applications potential employer Businesses that indicate future job growth.
The subset of business applications that are likely to become an employer's business can be separated from the overall trend of applications. Job-creating applications must either specify a plan to hire and pay employees or be associated with a particular industry that has historically been more likely to create salaried jobs, such as new retail, health care, or food service. I am. As seen in Figure 1, more than 5 million new job creation applications have been recorded since the Biden-Harris administration took office. This represents an increase of approximately 35% compared to his average monthly filings from 2004, when the series began, to his January 2021.
Is this just a reactionary reaction from the COVID-19 recession?
The surge in business applications is unlike the recovery after the last recession and is unlikely to be fully explained by typical business cycle patterns. An unusually high number of business failures, which are common during economic downturns, may be followed by an unusually high number of business creations as the economy recovers. Figure 1 tracks business applications across his two business cycles, the Great Recession and the COVID-19 Recession, and reveals two distinct recovery patterns. In particular, job-creating business applications, which were characterized by a slow recovery in the post-Great Recession quarter, are now seeing a surge in applications in the post-COVID-19 recession quarter.
Moreover, alternative measures for business activity indicate strong growth in online business creation rather than a renormalization of business activity after the COVID-19 recession. For example, the dynamics of the birth and death of establishments can provide an early indication of long-term trends in business creation. To this end, Figure 2 plots the birth rate (light blue) and death rate (dark blue) of establishments from 2000 to 2023 from corporate employment dynamics data published by the Bureau of Labor Statistics. The birth rate for all establishments accelerated in 2020, reaching an unprecedented 4.1% for all establishments in 2022, compared to 3.2% between the Great Recession and the COVID-19 recession. Ta. On the other hand, business mortality rates followed a pattern similar to previous economic cycles during the COVID-19 recession and recovery period, ranging from 2.6% to 3.1%. As a result, the gap between establishment birth and death rates over the past three years has widened compared to the previous business cycle, indicating a continued shift toward high levels of new business formation.
Looking at trends in the number of establishments over time, we find that real growth in business formation has outpaced business disappearance and has recently surged. Figure 3 reports that the year-on-year change in the number of establishments in private industry increased from an annual rate of 1.4% from 2000 to 2019 to nearly 6% in 2022. In fact, over the past three years, annual business growth (5.4%) has been faster than in any single year over the past quarter century.
Finally, a simple recovery story suggests that the same number of firms will be operating in 2023 as in 2019, but that an acceleration in births will result in an increase in the number of firms. In fact, the number of establishments reported as part of the Bureau of Labor Statistics' quarterly Employment and Wage Census provides an external validation of recent adoption trends by showing increases in the number of establishments that create jobs. becomes.
The data series shown above are drawn from various surveys and administrative records, and show that the increase in business applications since the beginning of the Biden-Harris administration has likely contributed to the continued strength of the U.S. workforce. This suggests that this is consistent with the rise in business formation. Current and future markets. Recent economic research and popular media point to several factors. For example, the pandemic has brought about new consumption patterns and preferences for work-life balance. Additionally, a strong social safety net during this regime allowed families the freedom to take risks, such as starting new businesses. We believe these changes, coupled with continued federal support for small businesses and entrepreneurs during this administration, have provided opportunities for entrepreneurs to respond to the needs of consumers and businesses in new and creative ways. . There are also new signs that the economic environment in recent years is becoming more business-friendly. For example, minority-owned businesses experienced significant growth during this period, with the number of Black business owners increasing faster from 2019 to 2022 than at any time in the past 30 years. Although the specific economic factors underlying the increase in business activity remain unclear, the rise in new business formations is a very welcome trend, allowing budding entrepreneurs to pursue their dreams and contribute to job creation at the same time. This suggests that the path to achieving this goal is expanding.
