Even a global pandemic cannot suppress the American entrepreneurial spirit.
That is the apparent conclusion to be drawn from the most recent Census Bureau data on business formation. Through the first three quarters of 2020, new business applications were 27 percent higher than during the first nine months of 2019. For those business applications that are deemed to be likely employers (labeled “high-propensity” in the data), applications were 18 percent higher through September compared to last year.
The July through September quarter of this year, in fact, saw the highest number of business applications of any quarter going back to 2005. Like, not even close.
There are, of course, nuances. On a weekly basis, business applications fell sharply in April and May. That’s not surprising. Most of the country was in lockdown, everyone was cutting spending and saving more. Once the country re-opened, entrepreneurs followed suit. It’s also possible that some share of the subsequent rise in business applications was accounted for by those who had been forced to close their businesses in the spring. Additionally, the third quarter spike appears to be concentrated in certain sectors. In particular, “non-store retailers” account for one-third of the increase relative to 2019. That is, online stores.
Nevertheless, according to John Haltiwanger, the correlation between business applications and actual business creation is quite strong. We should expect to see a bump over the next year in business creation. (Which is tracked in a separate dataset; I’ll spare you the methodological parsing of what all the different terms mean.)
The question hanging over these statistics is: does the 2020 surge represent the start of a long-term trend? Or, will it diminish as the economy moves toward something resembling normalcy in coming years?
Heading into 2020, the outlook for American entrepreneurship was less than encouraging. Following the 2008-09 recession, new business creation was slow to recover. Actually, it didn’t recover. From 2010 to 2018, average annual new business creation was 14 percent lower than from 1978 to 2007. That’s roughly 70,000 fewer new businesses created each year—and this refers to employer firms, those with paid employees. For prospective entrepreneurs filing their business applications (the “high-propensity” ones), the quarterly number never reached the level of Q3 2007 until Q3 2020. Many researchers spoke of a “startup deficit” facing the country.
So, what might 2021 entail, and what can we expect from the incoming Biden administration? Encouragingly, entrepreneurs are included in the president-elect’s economic recovery plan. His campaign policy platforms consistently mentioned small businesses and entrepreneurs—unsurprising given the high-profile struggles of small and young businesses this year. Rightly, Biden and his advisors have spoken about the need to help business owners of color and those in parts of the country desperate for job creation. There will surely be moves at the federal level—through regulations and executive actions—to assist entrepreneurs who have not been well-served by the financial system and investors.
Entrepreneurship has historically been a bipartisan issue in the United States. Republicans have also expressed a desire to offer more assistance to struggling small businesses and entrepreneurs. That’s good news for recovery. Yet the two parties may get hung up on the fiscal implications of additional action. With the government already operating at record deficit levels, will there be appetite for large injections of public money to support business creation and growth? If not, Washington will need to get creative in figuring out how to support an entrepreneurial recovery in ways that are budget neutral.
The challenge for policymakers in Congress and the Biden administration will be in sifting through three concurrent trends. Two have already been discussed: the business application surge in 2020 and the longer-term stagnation in business creation. The third is the continuing pain of existing business owners; many foresee a wave of bankruptcies in coming months.
It’s almost certain that there will be another federal relief package which will include support for small businesses. Beyond that, it’s possible that record levels of business applications will blunt any urgency for further reforms. We simply don’t know if the 2020 resurgence is a blip or a trajectory. Hopefully, despite that unknown, actions can be agreed upon in divided government that will lay a strong foundation for entrepreneurial growth.