Americans are racing to create new businesses during the pandemic

Blog - 12 - 10 - 20

October 12, 2020

At a moment of intense uncertainty, Americans are rushing to form new businesses — one positive sign for the economic recovery.

What’s happening: Applications to start businesses in the United States are at their highest level in more than a decade, according to data from the US Census Bureau. For the week ending October 3, the most recent data available, requests jumped nearly 40% from the same week one year ago.

This trend is very encouraging, according to Joseph Brusuelas, chief economist as RSM US. After a deep recession, you want a chunk of displaced workers to feel confident they can take advantage of pro-business conditions like low interest rates and strike out on their own, he said.

“This has been one of the primary catalysts of resilience of the US economy throughout its history,” Brusuelas told me.

New business applications spike

The number of Americans looking to start their own firms is at its highest level in more than a decade.

New business applications did not noticeably increase after the recession that followed the 2008 financial crisis. Brusuelas said that was one signal that the recovery wasn’t going as planned, and that damage from people losing homes, cars and equity ran deep.

This time around, the crisis is hitting renters more than homeowners, he pointed out. That’s still troubling, but means that many Americans have held on to a key source of wealth, and may be more willing to take financial risks.

“One of the mistakes we made in the last crisis is we didn’t create the conditions for people to move toward the formation of businesses,” Brusuelas said.

Also helping: The work-from-home era is opening up new business opportunities and providing flexibility for would-be business owners. The ability to borrow cheaply is a boon, too.

In a recent research note, Goldman Sachs observed that some of the surge may be attributable to a backlog in applications from the lockdown period. Even so, “the data suggest a much more positive outlook for new business formation than after the last recession,” the investment bank said.

The big question is whether the rise in new businesses can help create jobs as the labor market recovery stalls. The country is still down 10.7 million jobs since February.

Goldman Sachs said that based on its analysis, applications indicating plans to employ workers “have increased more modestly.” But the rise in new firms is one reason it’s staying optimistic that jobs will return faster than in past slowdowns.

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