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.
1 (646) 776-7714
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.