The growth in new firms created in the United States in 2020 and 2021 was a welcome surprise. The growth may be attributed to various factors, including layoffs, modifications in how people choose to work, changes in company practices, and so on. There is no way to predict the future of entrepreneurship given the present information available. There are valid reasons to be both hopeful and pessimistic about the future.
Let’s evaluate what we already know to make some kind of prediction.
From July 2004 through February 2020, according to the Census Bureau’s Business Formation Statistics, the number of businesses operating in the United States averaged 231,000 each month. See “Enterprise Utility” (also known as an EIN or employer identification number) for further information.
That’s just plain cruel. The figure below shows that business functions declined somewhat during the 2008-09 and have since recovered extremely slowly. The number started to rise around the year 2015. By February 2020, the month-to-month average would be 24% higher than between 2009 and 2015.
As expected, business operations shrank dramatically in March and April 2020. There was a 22% reduction in the amount in April compared to February. Nobody could have predicted what would happen next.
In 2020, business functions will be on the mend—and then take off. There has been a 92% increase in monthly business functions from June 2020, compared to July 2004 to February 2020.
Something similar has happened with “high propensity” business functions, which the Census Bureau considers a high likelihood of becoming employer businesses. From 2008-09, high-propensity enterprise functions never fully recovered. The month-to-month average was 18 percent lower from July 2009 to February 2020 than from 2004 to 2007.
As seen in the FRED data, the month-to-month average of high-propensity enterprise functions zoomed skyward in mid-2020 and has stayed at record levels. Since June 2020, the average has increased by 39% compared to July 2004 to February 2020. In the first two months of the epidemic, many of these functions also dropped dramatically by 31% from February to April 2020.
Pessimism And Optimism
The last 4 or 5 months have stagnated enterprise functions based on BFS knowledge. The issue is whether this is the start of a new age of corporate growth or the start of a slowdown and a return to pre-pandemic levels.
“There’s no evidence of the development stopping down,” QuickBooks recently said. QuickBooks estimates that there will be 5.6 million business functions in 2022 based on current application totals. That would be a 28 percent increase above the previous high-water mark of 2020.
This might be the low end of QuickBooks’ forecast since, according to a recent poll they conducted, 17 million people will “take the jump” and start a new business in 2022. (The difference from the 5.6 million predictions is that not all of them will apply for an EIN.)
The Financial Innovation Group (EIG) alluded to “causes to be cautious in comprehending the clear spike in business creation” in its final study of BFS expertise, released in October. Uncertainty over what is causing the uptick is one of these factors. Is it the Nice Resignation or something else? A pandemic reaction shortly? Is there anything else? Furthermore, EIG considers that businesses founded during recessions are more likely to “remain smaller” than those founded during booms. Others are more gloomy, saying, “One shouldn’t be excessively excited about the employment produced by this surge of entrepreneurs.”
Despite this, the pandemic recession was exceedingly brief and not like a “normal” slump. We wouldn’t be able to apply for courses from earlier recessions directly to this one. At the same time, it indicates that the pandemic wave may include many “missing entrepreneurs.” We all know that some types of business owners—women, Blacks, and immigrants—felt a greater negative impact early in 2020 than white men.
We don’t know how the growth in enterprise functions affects the demographics. If it follows pre-pandemic tendencies, inequities in entrepreneurship and business ownership will exist and expand. Continuing inequities would suffocate total business creation.
In the year 2022, new businesses will be…
We may be able to make at least one assertion with absolute confidence. In 2022, the rate of business failure is expected to be higher than in the past (and past). What about launching a new business? An increase in the number of new businesses leads to an increase in the number of close businesses.
It’s important to remember that, before the epidemic, business formation in the United States had been essentially stagnant for a few years. It was dubbed a “misplaced decade” for American entrepreneurship” by EIG. One of the deep-seated and long-term factors leading to slow business formation is unlikely to have changed in the previous year. For example, one cause for the long-term fall in business development has been a slow improvement in the labor force. This has not changed in Covid.
According to the PIIE report, the pandemic rise is “primarily ascribed to entrepreneurship by necessity.” Apart from the need to do rid of this archaic mischaracterization of entrepreneurship, the statement is correct. Early in the epidemic, it seems that layoffs drove up the number of business functions. However, when the labor market tightened in 2021, we did not notice a comparable decrease in enterprise functions. Month-to-month figures (whole and high-propensity) have been consistent for many months.
According to a conservative estimate, total business functions (including potential employers) will be lower in 2022 than in 2020 or 2021 but higher than the pre-pandemic average. Many of those who started businesses in 2020 and 2021 and failed will try again in 2022 or subsequent years. This may help to keep business creation at a high level. As many first-time entrepreneurs re-enter the labor force while maintaining their side hustle, what my friend and former colleague Paul Kedrosky refer to as “fractional entrepreneurship” will improve.
The demographic composition is a wild card. We can assist make the epidemic spike a long-term trend if we can close inequities in business ownership and entrepreneurship. If not, we will observe a decline in the stage of business creation for a few years and a general lack of entrepreneurial energy.
What’s the prognosis for you?