New Business Starts: 2020's Economic Bright Spot
Updated: Feb 17, 2021
Americans are starting new businesses at historic rates. After a 2020 that delivered unrelenting bad news -- a year in which the US posted the largest single quarterly decline in GDP, unemployment quadrupled in a single month, and entire industries were shuttered by governors attempting to deal with the spreading coronavirus -- new businesses, like the first tentative shoots following a forest fire are sprouting in record numbers.
Business creation has generally followed a pattern of retrenchment then slow growth following economic dislocations. For example, new business formation dipped by 4-5% in the two years following the financial crisis of 2008 triggered by the meltdown in the mortgage market, then rose slowly through the end of 2019 at an average annual rate of slightly less than 4%.
The economic dislocation prompted by state and federal management of Covid has changed this trend dramatically. As public concern about the disease grew and states shut down businesses and ordered individuals to stay at home, new business applications dropped significantly in March and April 2020. But beginning in May, new business starts began a dramatic rise that peaked in July at over half a million, an increase of more than 75% over the prior high for any single month in any prior year. In 2020, Americans started new businesses at a 24% higher rate than the prior year, marking the largest single-year jump since the statistics have been kept.
Why have Americans reacted to this economic dislocation so differently in terms of new business creation?
As with any trend in business start-ups, the reasons are many. The initial uptick in
new starts likely included applications from people who had delayed launch plans earlier in the year according to Timothy Sullivan of SIU-Edwardsville. A second theory holds that many individuals started businesses to take advantage of the Small Business Administration PPP program and other state grant and loan programs for businesses. The relatively greater increase in non-high-propensity new business applications as compared high-propensity businesses (those with both lease and payroll) suggests this may account for some of the uptick.
Further, applications for businesses with planned wages, another metric tracked by the Census Bureau, decreased from the historic rate of 14.5% of all applications to 12.5%.
The single biggest impact in new business formation, however, is the magnitude and breadth of this economic dislocation as compared to those of the last 50 years. As compared to those crises, government’s reaction to Covid has resulted in a much deeper decrease in economic activity and much swifter impact on unemployment. Illinois’ experience has been typical of many states, and while its economic impacts have been more severe than many, it is emblematic of the current trends. In March, Illinois’s governor shut down all businesses except those specifically exempted by his executive order and required all people to stay at home unless for purposes also exempted by the order.
In a single month, unemployment quadrupled leaving more than 1 million people looking for work.
Schools were shuttered requiring parents to supervise their children during the school day making it difficult to work during traditional business hours. Today, unemployment remains more than double the level prior to the governor’s initial executive order nearly a year ago.
In Illinois, as in many states, entire industries were decimated by lock-down and stay at home orders. The hospitality industry, which includes catering, events, and restaurants, is a case in point. Many of these businesses have already closed permanently, and many more will fold before they are again allowed to fully re-open. Even those restaurants than have remained open have been forced to lay off staff. They struggle to meet their fixed costs including rent and mortgage which have not been reduced along with their ability to conduct business. Nationally, the industry accounts for 11% of employment but has suffered 35% of all Covid-related job losses according to hotelmanagement.net, and of those who remain employed, many have had their pay or benefits reduced.
In this environment, with unemployment still double pre-Covid levels and the fate of entire industries still uncertain, it is not surprising that many would turn to new business formation as the only realistic opportunity to return to economic self-sufficiency. As the chart below shows, the uptick in new business formation followed the dramatic spike in unemployment by about three months. For the year, new business applications increased a whopping 45% over 2019, nearly doubling the increase nationally.
Bootstrap Consulting, a new business incorporated in August 2020 and dedicated to helping small businesses grow through high-impact, low-cost digital media, represents this trend. The co-founders, Sommer Gay and Nicole Fitzpatrick, had a similar experience to most in the hospitality industry. After Fitzpatrick was furloughed and subsequently lost her family’s health insurance and Gay was forced to close her business due to the governor’s Covid restrictions, they joined forces to start their own company. With many people still confined to their homes or choosing to remain at home to work, Bootstrap created a digital marketing offering to provide an efficient and effective means for small businesses to reach employees and customers wherever they may be.
Higher rates of new business creation have typically been accompanied by increases in new business failure. By supporting small businesses, especially new businesses, the Bootstrap team believes that their efforts, along with others like them, will help ensure that the many new businesses now cropping up on the American economic landscape will grow to full maturity. And they hope that these many new businesses, which collectively represent one of the few bright spots of 2020, will provide the economic engine to return to high employment and fuel the recovery of the American economy.