New businesses are still forming far above pre-pandemic levels despite high interest rates — although elevated rates are weighing on young businesses.
Overall, the rate of new business applications as measured by the Census Bureau has settled into a 12-month average of 455,000 per month, according to an analysis by NerdWallet. That’s far higher than the 293,000 new business applications on average the Census Bureau recorded in 2019 — about 48% higher.
Meanwhile, the number of establishment “births,” or when a new business hires employees, accounted for about 3.1% on average from 2018 to 2019. That surged to 4.3% in late 2021 before settling down at about 3.6% over the last year.
“Economic conditions over the past several years have proven favorable for many new businesses, and the data indicates these startups are finding early success,” said NerdWallet’s Senior Economist, Elizabeth Renter, in a statement. “However, the rest of the year will be marked by continued high funding costs and potentially waning consumer demand, which could make things difficult for the less established firms.”
For years after the Great Recession, the Federal Reserve kept its federal funds rate, which serves as the rate at which financial institutions could borrow, at or near zero, before slowly raising it above 2% in the run-up to the COVID-19 pandemic.
At that point, the Federal Reserve dropped it once more to zero, before rapidly raising it in 2022 to above 5% to help fight what it saw as high inflation and an overheated job market.
That has led to a series of challenges, including volatility at banks, various struggles in the housing market and borrowing rates for small businesses often double or more what they were a few years ago.
“Owners of new businesses can prepare for the coming months by having a game plan,” Renter said. “Businesses that depend on discretionary spending, in particular, should plan for lean times. It’s better to be prepared and not need it than to be caught off guard.”
Meanwhile, the Federal Reserve has tried to aim for a so-called “soft landing” from inflation, in which a cooling labor market does not tip the country in a recession.
Overall, the latest data from the Bureau of Labor Statistics found the labor market has remained relatively static over the past few months, with job openings at about 8.1 million, down from pandemic-era highs but above pre-pandemic numbers. The quit rate has since returned to pre-pandemic norms.
“These small establishments were experiencing open roles well above the rate that larger businesses were since last summer. Small-business owners who struggle to fill vacancies can be forced into more dramatic measures — like cutting hours of operation — so it’s heartening to see their rosters better filled,” she said.
Number of new businesses reverses long-term business decline
For years before the pandemic, Census data and other sources showed a decline in new businesses and a series of headlines that decried the “slow death of entrepreneurship” and “the mysterious death of entrepreneurship in America.”
More recently, the United States has seen a small-business boom that shows no signs of letting up. In 2023, 5.5 million new business applications were filed, according to the Census Bureau — the strongest year of new business applications on record and the third year of consecutive growth.
Census data showing a record-breaking 5.5 million new business applications were filed in 2023 alone, making it the strongest year of new business applications on record and the third consecutive year of historic small-business growth. Between 2021 and 2023, the U.S. has seen more new business applications than the prior four years combined.
The COVID-19 pandemic drove down legal immigration rates — the number of legal permanent residents — to lows not seen since 1999. In 2020, there were roughly 707,000 new legal residents. In 2022, that figure grew to around 1 million, slightly below the years leading up to the pandemic.
Who is starting businesses in America?
Previous data from Gusto shows the makeup of entrepreneurship has changed substantially since before the pandemic.
About 10.7% of new business owners in 2021 were veterans — nearly double the 5.4% tracked by the U.S. Census Bureau in 2019. Women accounted for about 49% of new businesses formed in 2020 and 2021, compared to 28% of new businesses in 2019.
The share of Black entrepreneurs who launched businesses also rose, from 3% in 2019 to 9% in 2021, according to a separate survey by Gusto.
Additionally, Gusto found part of the small-business boom is increasingly being driven by immigrant entrepreneurs. While immigrants make up about 14% of the population, they founded about 17% of new businesses in 2023. The children of immigrants also started 17% of new businesses last year.
About 85% of new immigrant-owned businesses had at least one employee, compared to 78% of all new businesses. And 25% of immigrant-owned businesses said they planned to hire more employees in 2024, compared to about 20% of all businesses.
This story ran in The Business Journals on July 5, 2024.
