Weekly Update on COVID-19’s Impact on Business Formation and EntrepreneurshipNov 5, 2020
EIG is tracking COVID-19’s impact on prospective entrepreneurial activity in the United States with weekly data on business formation provided by the U.S. Census Bureau. The statistics below focus on “high-propensity” business applications, a specific subset of applications for new Employer Identification Numbers (EINs) identified by the Census Bureau as having a high likelihood of becoming active businesses with employees within several months after filing. We refer to these high-propensity applications as “likely employers” here.
In the wake of an abrupt falloff in nationwide business formation at the start of the pandemic, business applications from likely employers have surged in recent months. Nearly 162,000 additional applications have been filed so far in 2020 compared with this point last year. The elevated numbers have more than compensated for the initial gap in business formation that opened up early in the pandemic: Likely employer applications through week 44 total almost 1.3 million—a jump of 14 percent over the same period in 2019.
Even though the rate of filings is slowly drifting back down toward pre-pandemic levels, the pace nationwide remains well-above last year’s. In the week ending October 31st, likely employers submitted 30,260 applications, representing a substantial 26 percent increase over the same week in 2019. However, seven states, including major hubs of business formation such as Washington and Massachusetts, still slightly trail the number of likely employer applications recorded through the same period last year.
Recently released industry-specific data covering all business formations—not just those likely to hire employees—show that a handful of diverse sectors are leading the surge. The leading sector is non-store retailers that are likely to sell goods online or directly to consumers via home delivery, which account for just over one-third of the increase in applications through early October relative to last year.
Other industry categories that have spiked amid shifting consumer habits during the pandemic are a mix of those one might expect, such as truck transportation, and others that come across as initially more surprising, including personal and laundry services as well as food and drinking establishments, both of which were hit hard by springtime lockdowns and social distancing measures. The wide-ranging professional, scientific, and technical services category together with administrative and support jobs are responsible for about 15 percent of the increase. In total, applications are at or above last year’s levels in well over half of the detailed industry categories the data tracks.
Some of these industries are more likely to produce businesses with active employees than others. But it remains unclear how much of the increase is attributable to entrepreneurs finding opportunity in the crisis to form businesses likely to hire employees as opposed to newly unemployed individuals starting their own businesses. The latter are more likely to be non-employer firms (opting for self-employment) that are not well-positioned to fuel a rapid jobs recovery. Nevertheless, the sustained and unprecedentedly high rate of new business applications hints that the current crisis could be part of an accelerating restructuring of the economy, as entrepreneurs and everyday workers adapt to a new economic reality.
Even with the knowledge of which industry sectors are powering the wave of applications there are several reasons to interpret the data with caution: Applications in the manufacturing, retail, health care, and restaurant industries are automatically tagged in the data as businesses likely to hire employees, even if that may not be the case. The data also captures some purchases of existing businesses, so a portion of the upswing could represent a churn in business ownership rather than actual anticipated new business formations. Nevertheless, anecdotal evidence provides good reason to believe that much of the bump is real.
The effect of the current crisis on business formation is playing out quite differently from the Great Recession more than a decade ago. That downturn resulted in a steady decline in business formation in its initial year: Through week 44 of 2008, the total number of applications from likely employers were down by nearly 17 percent. After that crisis, startup rates remained depressed all the way through at least 2018, a year in which the United States produced fewer startups than it did in 2001, a year of recession. The fact that house prices and asset prices generally have remained buoyant throughout the pandemic recession could provide one explanation for why indicators of entrepreneurial activity look so healthy—the capital sources many entrepreneurs rely on to launch their businesses remain relatively unaffected by the crisis.
Despite this seemingly promising trend in new business formation, the net effect on the overall count of businesses will be tempered by the scope of closures this year. Almost a quarter of small businesses were shuttered as of late September compared with the start of the year, based on data tracked by Opportunity Insights. While the surge in new business applications is promising, only time will tell how many of these expressions of entrepreneurial intent actually turn into new businesses, and how many of those new businesses go on to survive from there.