One pandemic positive for the economy: A boom in new small businesses

We all know that the pandemic has been devastating for small businesses, We don’t have to look any farther than our neighborhood strip shopping center to see small business that have closed for good. And for many of those companies that have survived, their business is far from what it was pre-pandemic. The severity of the crisis will no doubt be felt for months or years to come.

During the stretch in 2020 from February to May, it looked especially bleak – 20 million jobs were lost nationally. Businesses were wiped out at a faster rate than during the financial crisis a decade earlier.

Yet there’s one very positive economic trend to report: There has since been a boom in new business formation.

 The number of entrepreneurs starting a business hit a record high in 2020. That’s , according to a new study from the National Bureau of Economic Research by University of Maryland economist John Haltiwanger. The data was  distilled from the first step typically taken by an entrepreneur in the creation of a business, an application for an employer-identification number required by America’s tax authorities, the Internal Revenue Service.

Applications for new businesses fell substantially in the early stages of the pandemic but then surged in the second half of 2020. This surge has continued through May 2021. The pace of applications since mid-2020 is the highest on record.

These patterns contrast sharply with those in the Great Recession when applications for likely new employer businesses and in turn actual startups of employer businesses plunged sharply.

The data also gives a rapid read on the changing economy. For example, the largest sector of new business formation during the surge of 2020-21 is in  “nonstore retailers,” who account for 33% of new businesses formed over the pandemic. They were helped a by e-commerce platforms such as Amazon, Shopify and Stripe and it’s a whole lot cheaper to set up a business there than with brick and mortar. Yet, Axios reports, physical businesses have been booming too in Texas, Florida, and Georgia, particularly for laundromats, trucking, and even restaurants.

Haltiwanger goes on to detail big differences between the crises of 2008 and 2020. In 2008, Americans lost billions of dollars in home equity, the stock market was crashing and banks stopped lending. In 2021, the crisis released trillions of dollars in new government spending, much of it for small business relief efforts, there was also no accompanying financial crisis and the stock market surged.

There is not solid data yet on how many small businesses closed during the recession. A recent Fed paper suggests that about 130,000 firms went out of business in the first year of the pandemic. That was up between a quarter and a third from normal levels, and much lower than many economists originally feared. But with the surge in new business creation, the total number of small businesses likely went up. To be sure, Americans are starting small businesses at  a record pace.

New Black-owned businesses surge most

A second study showed the trend among new Black-owned businesses was particularly strong.

Last year there were more new Black-owned businesses proportionate to the total population than at any time in the last quarter-century, according to the Kauffman Foundation’s annual study. Indeed, Black entrepreneurism ranked higher than for white-owned and Asian-owned companies, the group found.

On average, 380 out of every 100,000 Black adults became new entrepreneurs during the 2020 pandemic, up from 240 in each of the prior two years, according to the study based on census data.

Of course the surge was partly a reflection of the heavier toll the COVID-19 crisis took on Black Americans, in deaths as well as job and income losses, According to the researcher, 40% of Black-owned firms closed in the immediate aftermath of the outbreak versus 20% of all active U.S. businesses.  What’s more, the startup numbers likely include some businesses that were reopening after closing at the start of the pandemic.

Other surveys show the  boom could have been even larger. According to a LendingTree survey, one-quarter of Americans thought about starting a business during Covid-19, but the lack of financing was the big barrier for would-be entrepreneurs.


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