Americans continue to create new businesses in surprising numbers, a potential tailwind for an economy that this spring saw its highest jobless rate since the Great Depression.
The number of Employer Identification Number applications, which new businesses file with the IRS, fell sharply in March as the COVID-19 pandemic forced business shutdowns in many states. However, applications began rebounding by early summer especially in the South, which initially had a milder outbreak, and by now the growth has spread nationwide.
New business formations of any size hit 1.5 million in the third quarter, up 77% from the previous three months and 82% from a year earlier, according to the U.S. Census Bureau, which collects and publishes the IRS data. One caveat is that people often wait several months after filing for an EIN before actually starting their businesses, creating a lag in job creation.
John Halitwanger, a University of Maryland economics professor who closely follows the EIN filings, hailed the new numbers as “the highest on record” in a Twitter post.
More telling, the data suggest the new entrepreneurship extends to both sole proprietors and future employers. Census officials parse out likely employer businesses through clues on the EIN applications and label them as having a “high-propensity” to turn into a business with a payroll. Such high-propensity applications surged by 79% nationwide in the third quarter from the previous three-month period, the Census said.
The South had more of these likely employers file than any other region in the third quarter, up by 79% with more than 236,000 applications. The Northeast, which had lagged in filings earlier this year, rebounded with the biggest percentage gain, up 97% with almost 85,000 filings.
Mike Wootton is a franchise development executive for the owner of the My Eyelab chain of eyewear stores. With so much unemployment, he’s been targeting franchise sales to corporate middle managers who suddenly find themselves needing to replace their incomes. The challenge has been in certain big cities that continue to restrict operations with the virus, he said.
“We’ve been able to continue to see same-store sales increases this year,” Wootton said. “There was obviously an initial drop-off when all the stores closed, and then we were trying to kind of assess the situation and figure out how we get back to doing business.”
Late last month, Goldman Sachs economists commented on the entrepreneurial numbers in a research note it titled, “The Surprising Surge in Business Formation.” While some of the gains could be explained away by pent-up demand because so many people were locked down this spring, “the data suggest a much more positive outlook for new business formation than after the last recession,” the note said.
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