by Daniel Newman
- Over the first six months of 2023, applications to start a business likely to hire employees outpaced last year’s first half-year amount by more than 7 percent. Assuming the current trend holds, then this year’s annual total should be just shy of 2021’s record amount.
- Nearly 871,000 likely employer applications have been filed so far this year—a 36 percent increase over the prepandemic half-year baseline—and the second largest midyear total on record.
- The business application surge remains broad-based across most industry sectors, with the strongest year-over-year growth in healthcare, retail, arts & entertainment, and accommodation & food services.
- The leading communities for growth in new business formation are overwhelmingly in the South, a region home to seven of the top ten states for total business application growth since 2019.
Early-stage business activity across the United States remains robust through the first half of 2023, as the pace of new business formation actually strengthened over last year. Individuals filed nearly 2.7 million applications to start a business between January and June of this year, a 5 percent increase over 2022 and a staggering 52 percent increase over the same period in 2019. One-third of those filings were for new businesses likely to hire employees—a key subset of applications from the Census Bureau’s Business Formation Statistics demonstrating a “high propensity” to hire staff, if and when the business becomes operational. The volume of likely employer applications also remained well above prepandemic levels, surpassing the total from the first six months of 2019 by 36 percent. Startups and young companies—particularly those likely to hire employees—play an outsized role in job creation and wage growth.
The pandemic jump-started a promising period of strong business formation across the United States, and the increased activity shows no sign of abating three years on. Business applications serve as a timely and forward-looking indicator of economic activity and growth. However, it typically takes several months for an application for a new Employer Identification Number (or EIN, the underlying variable tracked in the data) to actually turn into a new business, and only a fraction of applications typically complete the journey. For instance, Census projects that about 9 percent of all applications filed in June 2023 will eventually become operational within the next two years.
Here we highlight several major takeaways for business formation through the first half of 2023. We focus on applications from likely employers because of their crucial role in job creation. We make most comparisons to 2019 in order to explicitly highlight how the pandemic-era economy has dramatically differed from prior trends up to 2020 when the pandemic hit, and to emphasize the staying power of the startup surge.
Business formation took a hit following the Great Recession and never fully bounced back—until the pandemic led to a gravity-defying jump that has entered its third year. In the first half of 2023, individuals filed nearly 871,000 applications to form businesses likely to hire employees, the second largest level on record. The surge has stood firm against both inflation and recession fears—and even a banking crisis—such that likely employer filings are up more than 7 percent for the first half of this year compared to last. Assuming this trend holds, then the annual total is on track to be just shy of 2021’s record amount. That year’s total was supercharged by a wave of adjustments across industries and business models and a surge in Americans striking out on their own as the country adapted to the pandemic shock.
The durability and growth of the startup surge is quite striking. Just over 145,000 applications were submitted each month this year on average after adjusting for seasonal variation—an increase of about 40,000 per month relative to prepandemic levels. The consistency in application levels exhibited over the course of 2023 offers further cause for optimism that the pandemic may have delivered a lasting, positive shock to American entrepreneurship. All together, more than 5.4 million applications to form likely employer businesses have been filed since the onset of the pandemic, and over 16.6 million applications in total when including solo enterprises and non-employers—more than in the five years before the pandemic combined.
The new business surge applies to nearly every major industry sector, but not all have seen an increase since last year.
The new business surge remains broad-based across sectors, and many major industries are even up relative to the first six months of last year. Despite the economic upheaval, the top 10 industries with the most applications have managed to remain unchanged since before the pandemic (although the rankings have been slightly reordered). The biggest gainers since last year were in several areas of the economy highly affected by the changing preferences and habits of consumers over the course of the pandemic:
- Healthcare and social assistance applications rose by 15 percent over the first six months of 2022—the biggest year-over-year increase among major industries. The sector is also up by 52 percent relative to 2019, holding steady with the third largest share of applications (13.5 percent).
- Retail trade grew 11 percent since last year and is the fourth largest sector, making up just under 12 percent of likely employer filings.
- Arts and entertainment businesses similarly increased by 11 percent over last year’s filings, as people have flocked to in person activities postpandemic, but the sector represents a relatively small share of overall applications at less than two percent.
- Accommodation and food services, by contrast, makes up the largest share of all likely employer applications and grew by 11 percent over last year’s numbers. Consumer demand for travel and dining out continues to propel growth in this sector, and it also boasts the largest gain relative to 2019, growing by 66 percent.
- Construction applications grew by 9 percent since 2022, and is the second largest sector by volume of applications (138,300, or 16 percent of likely employer filings). Filings remain up by about one-third over prepandemic levels, likely related to the high level of new housing starts in recent months.
For all these consumer-facing sectors, it remains to be seen what share of these applications for new businesses have off-setting firm closures elsewhere in the data, as economic activity adapts to different business models or reallocates to new locations (e.g., away from downtowns). Regardless of the magnitude of this type of reallocation, other sources of data on firms and establishments point to a large net expansion in enterprises since the onset of the pandemic. Yet even as growth in many sectors continues, interest in a few key industries has notably cooled this year:
- Real estate sector applications have declined by 10 percent relative to the first six months of 2022. Rising interest rates have made mortgage payments more expensive, somewhat dampening the supply and demand for housing, potentially contributing to this industry’s dropoff.
- Despite an uptick in manufacturing investments in parts of the United States, new business filings in the manufacturing sector dropped 8 percent so far this year. Manufacturing only makes up a tiny portion of the likely employer filings (2 percent) and generally has a low startup rate due to its capital intensive nature and dependence on economies of scale that benefit large, incumbent firms.
- Transportation and warehousing—a prime example of a sector that boomed during and after the pandemic—remains 41 percent above 2019 levels, but the year-over-year change is decidedly downwards, falling 7 percent relative to the first half of last year. The earlier growth recorded during lockdowns and more widespread reliance on remote work led to a surge in the need for delivery services and locations to store goods, but the sector appears to be stabilizing after an impressively rapid era of adaptation and build-out.
Southern communities are leading the pandemic-era surge in new business formation, both in terms of overall growth and on a per capita basis.
Business application growth for the first half of this year continues to be strongest in the South, home to seven of the top 10 states with the largest increases since 2019. More granular data at the county level is available for total applications (rather than for likely employers) but only through the end of 2022. In general, county-level patterns reflect trends seen at the state level, with some of the biggest county-level increases in percentage terms seen across a band of southern states stretching from Mississippi to North Carolina. Much of the Mountain West also stands out for its above average performance.
A persistent, open question, however, is why a large swath of the South has recorded some of the highest growth in recent years. In general, most business applications tend to be filed in places where lots of economic activity occurs—in populated urban areas and the surrounding metros—yet some of the strongest pandemic-era growth has been outside of these traditional hubs. Population growth, which has been particularly robust in parts of the South and West, can be a key ingredient for business formation, but many of the top-performing counties are actually quite rural with low populations and unremarkable recent population growth rates. Some of the leaders are likely advantaged by starting from very low bases, and indeed poverty rates and minority shares of the population are some of the strongest correlates with business application growth. Perhaps the economic, fiscal, or policy shocks related to the pandemic helped motivate or make possible entrepreneurship among certain demographics disproportionately. At this point, it is impossible to tell with available data, and the inability to differentiate between likely employer and likely non-employer applications at the county level limits our understanding further.
Another way to put the surge into fuller context is to look at the rate of filings relative to a county’s total population, which helps tease out which places exhibit a relatively higher propensity for starting new businesses. Mapping the number of total applications per 10,000 residents confirms just how much more startup-oriented parts of the South and West are relative to large swaths of the Midwest and Appalachia. For example, even though the number of applications in many West Virginia counties grew significantly relative to 2019, the per capita numbers remain among the lowest in the country.
The map further illuminates how much of a hold metropolitan centers still have on American entrepreneurship. Take Georgia, for instance, where the per capita leaders are overwhelmingly in the populous Atlanta metro area, led by Fulton (466 per capita) and Clayton (397 per capita) counties—rates in some cases that are nearly six times higher than in the state’s more rural northwestern and southern counties.
Despite unanswered questions, the persistently elevated level of business applications is a promising sign for U.S. dynamism and entrepreneurship.
Three years since the pandemic jump-started a wave of business activity across the county, two big questions remain: how many of these new business applications will indeed turn into genuine employer enterprises, and how economically significant will they be? Some answers to these questions will arrive in the fall of 2023, when the Census Bureau releases authoritative counts and employment figures for the firms that started and hired in 2021—the year with the most business applications on record. Yet even those figures will only be best estimates, refined over time as more and better information trickles in on business starts and closures alike.
Regardless, the big question is the magnitude of change, not the direction. Other data sources have already confirmed that the bump is real. The sustained boost to entrepreneurship observed across much of the country since 2020 should produce a sense of optimism for a healthier, more dynamic economy in the coming years. Historically there is a tight correlation between the number of applications and true business formation, and research suggests that business applications are strongly predictive of changes in total U.S. payroll employment about one year down the road—a positive sign for continued job creation in the coming months. Perhaps the surprising strength of the labor market itself offers some proof that the startup surge is real.