Rising from the ashes
admin | April 23, 2021
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Small businesses took an especially hard hit last year, although the PPP and its forgivable loans to small businesses offered a lifeline that undoubtedly saved thousands. Where many might see disaster, entrepreneurs apparently see opportunity. Data indicate that small business start-ups are occurring at an unusually rapid pace, pointing to the dynamism of as well as a bright future for the U.S. economy.
Business applications and formations
The Census Bureau collects data on new business applications. When an entrepreneur is considering starting a new business, one thing that they usually do is to file with the IRS for an Employer Identification Number, otherwise known as a tax ID. Not all applications eventually become actual new businesses, but a fraction of them do. The Business Applications series offers a leading indicator of new business formation.
As is quite clear, entrepreneurs have been extremely active since last summer (Exhibit 1). After running in a range of 200,000 to 300,000 from the beginning of the series in the mid-2000s to just before the pandemic, the gauge spiked last summer and has remained elevated since then. The March reading of 440,000 is the fourth-highest reading on record, behind only July and August of last year and January of this year.
Exhibit 1: Seasonally-adjusted business applications
Source: Census Bureau.
The Census Bureau has a model that projects business formations over the following four quarters based on the flow of applications and their likelihood of conversion into new businesses. That model shows that the estimated pace of business formations over the next year is as high as it has been since the mid-2000s (Exhibit 2).
Exhibit 2: Seasonally-adjusted projected business formations
Source: Census Bureau.
Yelp business openings
A less rigorous but perhaps timelier set of data on new business formations comes from Yelp. The firm compiles new businesses that either post on the Yelp site or are posted by customers. The data covers only a portion of the economy, focusing on services businesses like restaurants, beauty salons, auto repairs, and home services.
Yelp recently released data for the first quarter. Almost 147,000 new businesses opened, a comparable pace to prior (pre-pandemic) years. In fact, the reading was down by only 2% from the first quarter 2020 and up by 4% from the first quarter of 2019.
The momentum within the quarter is even more encouraging. New business openings surged in March to over 56,000, almost 10,000 higher than any month over the past year and the highest reading over the past 4 years.
While these data are not as comprehensive or as scientific as the Census Bureau figures, they corroborate the notion that new businesses are rising out of the ashes of the economic damage caused by the pandemic and are poised to be an engine for growth during the forthcoming economic normalization.
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