Good news about new business starts nationwide

The Economic Innovation Group has a fascinating report out this week on how we’re seeing a boom in new businesses being started – definitely a good sign at a time when some pundits are predicting a coming recession by the end of the year. (Thanks in this case to my previous Free the Economy podcast guest Connor O’Brien for tweeting out the link to his colleague Daniel Newman’s new analysis “The Startup Surge Continues: Business Applications on Track for Second-Largest Annual Total on Record.”) Key findings include:

• Over the first six months of 2023, applications to start a business likely to hire employees outpaced last year’s amount by more than 7 percent.
• Nearly 871,000 likely employer applications have been filed so far this year—a 36 percent increase over the pre-pandemic 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 hospitality.
• 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.

New business applications declined, understandably, from 2019 to 2020, when there were the most shut-downs and COVID-related economic dislocations. Starting in 2021, however, numbers have been significantly higher and show no signs of slowing down into the half-way point of 2023. EIG’s Newman writes:

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 pre-pandemic 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.

As mentioned, some of the biggest growth is happening in Southern states, and not just places that have been showing strong economic growth already like Texas and Florida. Many counties from Virginia, the Carolinas, Georgia, Alabama, Mississippi, and Western Tennessee are also seeing impressive new business growth.

That’s especially encouraging since many of those counties are lower income communities outside of the big, so-called “superstar” metro areas that have seen most income and workforce growth since the Great Recession. The report addresses this, with Newman writing:

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.

So, we may not be able to explain it yet, but we do know that historically there has been a lot of entrepreneurial energy in minority communities across the U.S. While people with lower incomes are less likely to have access to financing and business partners, they often see starting their own venture as preferable to trying to break into a social and professional world where they also have few connections.

Black women, for example, start small business at significantly higher rates than other demographic groups in the U.S., and first-generation immigrants are also more like to be entrepreneurial than native-born Americans. Alfredo Ortiz, who was also previously my guest on Free the Economy, discussed this dynamic at length in his book The Real Race Revolutionaries: How Minority Entrepreneurship Can Overcome America’s Racial and Economic Divides (my review of the book is here).

Let’s hope the surge continues. As the EIG analysis concludes, “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.”

We also covered this topic in Episode 31 of Free the Economy (new business segment starts 7:13).