The Startup Surge: Business Formation in 2021 on Pace to Break RecordOct 15, 2021
Update for Q3 2021
By Daniel Newman
The latest release of Census Bureau’s Business Formation Statistics data shows that nearly 1.4 million applications have been filed to form new businesses likely to hire employees through September of 2021 — the most through the third quarter of any year on record. Likely employer businesses are a subset of total applications capturing those most likely to hire employees if and when a business becomes operational (Census labels them as “high propensity applications”). The brisk pace means there have been roughly 409,000 more filings in 2021 than at the same point in 2019, or 255,000 more than at this point in 2020. The surge in new business formation began to take off in the middle of last year, and monthly filings this year have remained well above historical norms, an indication of the trend’s staying power.
The lack of strong new business formation in the wake of the Great Recession hindered the country’s economic recovery for years, but the economic resurgence from the pandemic is shaping up quite differently. Last year, applications to form new businesses — both sole proprietorships and businesses likely to hire and grow — reached unprecedented levels, with likely employer applications totaling around 1.5 million by year’s end, or just over 210,400 more than in all of 2019. Entrepreneurial interest seems even higher in 2021, which now claims six of the top 10 months for likely employer business filings on record. With three months left in this unparalleled year, it now seems almost certain that the elevated pace of business formation in 2021 will be sufficient to surpass the record-breaking total of 2020. The shock of the pandemic appears to have caused significant restructuring of certain industries and a realignment of some relationships between businesses and customers, hastening an end to the startup stagnation that defined the post-Great Recession economy.
Business formation appears to be on a record setting pace in 2021
A record-breaking 1,396,800 applications to form new businesses likely to hire employees have been filed in the first nine months of 2021, 41 percent more than at this point in 2019 (including nonemployers, all business applications are up by 58 percent). The pace is even 22 percent above the exceptional volume filed through September of 2020, when more than 1.1 million applications had been tallied amid an unexpected boom in potential business formation. However, the totals for the third quarter of this year are down by about 14 percent year over year — July to September of 2020 was the peak period for new business filings last year. Even though the brisk pace has cooled somewhat as 2021 progressed, the September total of 145,600 filings remains well above the pre-pandemic average of 108,000 for the month.
Industries highly affected by the pandemic showed the largest gains
The new business surge is broad-based and happening across almost every industry sector, as applications for new likely employer businesses through September were up across all major industry categories except agriculture and mining relative to 2019.
Despite this pervasiveness, new applications are concentrated in areas of the economy most affected by the pandemic. Nearly three-quarters of the gains over 2019 levels appear in just four industry sectors: accommodation and food services; retail trade; health care and social assistance; and transportation and warehousing. These sectors typically produce large numbers of business applications under normal economic conditions (representing 52 percent of all likely employer filings in 2019), but they also make up an outsized portion of the gains recorded during the pandemic: Applications in 2021 to form businesses related to accommodation and food services are up 75 percent over the same point in 2019, while the retail trade sector is up 62 percent, and health care and social assistance is up 36 percent. The transportation and warehousing sector has also experienced rapid increases in potential business formation — up 74 percent so far this year from the same point in 2019.
These high-growth sectors experienced extreme shocks to their normal operations throughout the pandemic. The jump in intent to form new businesses likely reflects a necessity to adapt in response to job losses during the downturn as well as an opportunity to fill new economic needs amid changing consumer preferences, supply chain issues, and novel circumstances brought on by the pandemic.
A promising development for the U.S. economy
While the surge in new business applications is certainly promising, it will be some time before the extent of business closures due to the pandemic can be tallied and we have a full picture of the net effect of the pandemic on the country’s business and entrepreneurial landscape. EIG's analysis of recently released Census data showed that heading into the pandemic, the country’s startup rate — the share of all firms in the economy that were formed within the past year — stood stable at 8.2 percent in 2019, essentially unchanged from 2018 and only slightly above the all-time low reached after the Great Recession.
It will take months to evaluate how many of these expressions of entrepreneurial intent covered in the business formation statistics actually turn into new firms that go on to hire workers, but research shows there has historically been a high correlation between the number of applications and true business formation. If the past is any guide and a substantial number of these applications turn into real new firms, their survival and growth will help power the economic recovery.
At the same time, there are reasons to be cautious in interpreting the apparent surge in new business formation. Even though elevated application levels have now continued for well over a year, individuals and corporations may still be reacting to the pandemic in ways that register in the data but that we do not yet fully understand. Not only is the number of true startups in the pipeline still unknown, but firms launched in recessions also tend to remain smaller than those launched during good times — leaving their potential impact on job creation unknown, too.
Ensuring that many of these likely employer applications do in fact turn into successful businesses with paid employees will help smooth our transition out of this pandemic. This entrepreneurial reaction to the economic shock is a testament to the U.S. economy’s underlying resiliency. Maintaining this high level of new business formation will be crucial in placing the economy on a strong and durable path to its recovery and helping eliminate the startup deficit that had built up in recent years.