Report: Small business formation is booming in the U.S.

Economic statistics from the first three months of the pandemic, from February to May 2020, were dire. Businesses seemingly evaporated overnight, and over 20 million jobs disappeared along with them. But a new study published by the National Bureau of Economic Research published in June shows surprising data about the state of entrepreneurship in the U.S. in the months afterward.

New businesses have been launched at record numbers from second half through May 2021, reaching over 6 million, according to the report. The research was compiled from U.S. Census Bureau information pertaining to applications submitted for an employer-ID number, which is required by the IRS and that is a hallmark sign of an entrepreneur preparing to start business.

In fact, the pace of new business applications during this period was the strongest since 2004, the year when the Census began tracking this data. May 2021 saw about 500,00 applications for a new business, making it the second-highest month on record and surpassed only by July 2020. 

The surge is evident among businesses comprising just one self-employed person as well as those the Census Bureau projects could employ multiple individuals. Most of the new businesses were formed in the foodservices, truck transportation, accommodation and e-commerce sectors. These finding make sense given the context of the huge shift to buying online.

Will the startup boom last?

Report author John Haltiwanger, who is also a professor of economics at the University of Maryland and a noted scholar of business formation, said the jump can be attributed to the economic reshuffling precipitated by the pandemic. The advent and widespread acceptance of remote work seem to have normalized working remotely, which has in turn spurred small business formation to meet those new needs.

Additionally, the Coronavirus Aid, Relief and Economic Security Act’s provision of emergency funds for families likely liked played a role by spurring some people to consider launching their own business.

But will new businesses created during the pandemic have staying power? Some speculate they are temporarily filling gaping holes necessitated by the pandemic. And the data isn’t in yet as to how they are performing. 

So far, the data confirms that the most significant surges in new business applications happened at the start and tail ends of the pandemic, which for some suggests that this was a pendulum swing that is bound to return to normal.

The forecast calls for a “restructuring recovery”

But report author Haltiwanger is bullish on the recovery. He says the economy’s recovery from the pandemic, rather than returning to normal, will instead become as a “restructuring recovery” in which startup businesses hold a crucial role. This is because even though many startups don’t make it, those that do succeed will create many jobs and stimulate productivity growth and innovation. Indeed, the sustained increase in new business formation, when it has occurred historically, has augured positively for the latter, he adds. 

More than just a glitch, the data should be considered proof that the way our economy is going to operate will be different, with where and work are done two of the most drastic changes we should anticipate.