Applications to Form a New Business Hit New Records in 2021

Yes, it is!

A record number of business formations for companies likely to hire employees reached record levels in 2021. This trend implies increased productivity (via the creative destruction mechanism that the famous Economist Joseph Schumpeter discussed in his research). According to his findings, the new firms that succeed usually introduce new ways to conduct business with greater efficiency as they enter the market to beat the existing competition. Additionally, to the extent that these firms hire more workers, it will also boost future economic productivity and growth. We should never forget that faster economic growth lifts all boats and raises the average standard of living for many individuals.

Using the Census Bureau Business Dynamics data, the latest statistical release revealed that from Jan. to Nov. 2021, the number of business filings reached an all-time cumulative record of 1.69 million from January to November 2021. For comparative purposes, the January to November cumulative figures for 2020 and 2019 stood at 1.4 and 1.36 million, respectively.

Why are so Many New Firms Being Created?

Traditionally, recessions destroy jobs and lead many to start their own business to survive. After the latest short recession (from Feb. 2020 to April 2020), we have noticed a surge in the number of business filings which eventually translate into actual business formations.

The reason for this surge was probably due to several factors. First, studies by the Dallas Federal Reserve and the St. Louis Federal Reserve hinted that 1.5 to 3.0 people decided to retire early. Many have concluded that fears of contracting Covid-19 may have prompted the surge in early retirements. It may be reasonable to conclude that some of these cohorts may have decided to start their own business to follow their dream using some of their retirement nest egg and the availability of low-interest rate loans.

The census bureau also reported that the fear of contracting Covid-19 may have prompted over 3.0 million people to quit their jobs. The record gains in the U.S. equity market (the S&P 500), and the record gains in Household Wealth (reported by the Federal Reserve), may have also supported this trend. To be sure, some individuals may have opted to start their own business using methods to prevent catching Covid-19 they developed themselves.

The massive disappearance of child-care slots/options caused by the pandemic may have also encouraged others to start their own business that permitted a more flexible work schedule that could accommodate the reduced availability of child-care. It is no secret that self-employed individuals enjoy more work schedule flexibility.

Which Sectors Are Enjoying Increased Business Fillings?

The sectors that enjoyed the most business filings were those heavily hurt by the pandemic. The Census Bureau (Business Dynamics), reports that 75% of all new business filings were in the following sectors: the accommodation, and food energy, retail trade, health care, and social assistance, and transportation and warehousing. The good news is that the new business created in these sectors will likely operate more efficiently in future pandemic settings.

Summary and Conclusions:

The record pace of new business filings is likely to result in record business formations over the next 12 to 24 months. And while some of these new firms will not survive, many of these firms that do are likely to bring innovation and greater productivity (based on the findings of Joseph Schumpeter's creative destruction hypothesis) to the U.S. economy. For those firms that cater to new business created, it will be imperative to focus on the sectors leading the way (e.g., accommodation, & food energy, retail trade, health care & social assistance, and transportation & warehousing).