Business Formation Outlook: Growth May Slow but Remain Healthy

Business Formation Outlook: Growth May Slow but Remain Healthy

During the pandemic, business formation in the U.S. hit new historic highs. While growth has since slowed, entrepreneurship is still going strong.
Business formation and entrepreneurship witnessed a historic increase during COVID-19. Just a few months after the pandemic reached critical mass, filings for new businesses grew 69.7% year-over-year (YoY), according to data from the U.S. Census Bureau. This figure remained above 60% YoY into 2021. The U.S. was witnessing one of the fastest expansions in new business formations anywhere in the world, according to the Peterson Institute for International Economics.
Looking forward, we anticipate business formations in aggregate to slow from the rates observed during and after the pandemic but to remain healthy. But the story is nuanced, and certain sectors are poised to perform better than others.

Rate of Business Formation Grew During the Pandemic To Historic Levels

There are two types of business applications we monitor: Filings for a business as well as those filings that are expected to turn into firms that will hire employees one year forward. Business formations typically rise after a recession.
But it’s a gradual pickup. For example, after the global financial crisis in 2008-2009, it took five years for the aggregate number of business applications to reach their pre-crisis levels, and annualized growth never really breached 11% YoY. Thus, the 69.7% YoY growth seen in COVID-19 was staggering.
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There were likely a few factors driving strong business formation growth during the pandemic:
  • A shift in lifestyle preferences: The rise of the gig economy.
  • Changes in labor demand: COVID-19 initially brought a rise in layoffs, which led to an uptick in entrepreneurship.
  • Interest rates: Lower barrier costs to starting a company.
  • A rise in household wealth: Individuals had funding as seed start-up capital for their new business ventures.
In fact, household cash balances increased by $2.9 trillion, real estate wealth grew by $7.6 trillion, and personal stock and bond portfolios gained $13.1 trillion, per data from the Federal Reserve Board (2019-2021). This means would-be entrepreneurs had access to cash, which they could use to launch their new ventures.

New Businesses Helped Offset Job Losses During the Pandemic

In 2020, business applications increased by 860,900, and new business formations grew by 71,700. Remember the difference between an application versus what turns into an actual company that hires employees. In 2021, those numbers grew to 1.1 million applications and 225,900 establishments.
After job losses in early 2020 due to the pandemic, new business formation helped create 1 million jobs in the second half of 2020, representing 21% of total job growth, according to data from the U.S. Bureau of Labor Statistics. Throughout 2021, entrepreneurship added 1.4 million jobs to the economy, accounting for 19% of all job growth.
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While business formation growth occurred across industries, manufacturing, professional services, and information (including a large share of technology firms) saw outsized gains.
This was likely due to the Inflation Reduction Act and the CHIPS and Science Act, which directed government funds towards these sectors. At the same time, historically low interest rates likely channeled investor capital toward startups.

New Businesses Account for a Large Share of All Companies; Less So on Labor

New businesses represented 10.7% of all companies in the early 2000s. This fell to 8% during the global financial crisis but is now back up to 11.6%.
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However, new businesses account for 2.9% of all labor, down from 4.7% two decades ago. This is because much of the new business formation is in information technology and other services that are less labor intensive.
By 2023, higher interest rates and falling household savings resulted in a slowdown in business formation. New business growth added just 220,000 jobs in the first half of 2023, accounting for 12.6% of all job creation, and down from the 2018-2019 average of 19.0%.

Business Formation Growth Will Likely Slow, but Remain Healthy

Looking ahead, overall business formation growth is expected to remain positive with divergence across industries. The below figures showcase our expectations for business formations leveraging U.S. Census Bureau.
All businesses: Formation could increase by 3.1% YoY in 2024, which is lower than the last few years, but is still healthy and similar to the long-run trend.
Healthcare: This sector is largely immune to macroeconomic conditions and will likely grow at similar rates in downturns and expansions. More than 3,000 new healthcare entities are expected to form in 2024, up 7.8% from 2,300 in 2019.
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Retail: Expect to see increased business formation; much of it will likely be e-commerce. Online sales now account for 15.6% of all retail transactions, up from 11.2% pre-pandemic and 4.1% after the global financial crisis, per data from the U.S. Census Bureau. The number of brick and mortar stores may rise slightly. Labor growth may be capped, though, as existing retail centers have kept much of their staff.
Restaurant and hotel: More than 4,000 new restaurants and hotels are expected in 2024, an increase of 8.6% YoY and one of the segments with fastest projected growth. Consumers are devoting almost 6.5% of their budgets to restaurant meals, which is above the pre-COVID trend. In addition, the number of restaurant locations reached 612,000 nationwide, well above the 568,000 in operation pre-pandemic. Growth in this sector may face headwinds in the near future due to saturation.
Information: This segment includes tech startups, which are very sensitive to interest rates; when rates rise, venture capital investments typically decline. Growth slowed when the Fed began to raise interest rates in 2022, but with the Fed poised to cut rates in 2024, private capital could rise again helping lead to 7.0% increase in business formations.
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Manufacturing: New entity formation for all manufacturing is set to decline by 3%. However, the outlook for advanced manufacturing is positive. Demand for battery, semiconductor, and data centers is set to remain robust. Geopolitics and government stimulus may play a supporting role.
Real estate services: Business formation growth could decline by 7.9%. And after the recent decrease in home sales, real estate affiliated services may see a decline in both business creation and wages.
Transportation and warehousing: Business formation is expected to contract by 10.4%. The surge in demand for goods is waning in the U.S., thus affecting demand to move goods, too.
In total, business startup trends are expected to slow in 2024, returning to more normal rates of growth after the pandemic-era surge. Sectoral differences should emerge, with some declining and others accelerating. Across all industries, almost 30,000 new entities could form in 2024, led primarily by healthcare, professional services, restaurants, and hotels.
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La información proporcionada en estos materiales brinda información general y de asesoría. It shall not be considered legal advice. The Hartford does not warrant that the implementation of any view or recommendation contained herein will: (i) result in the elimination of any unsafe conditions at your business locations or with respect to your business operations; or (ii) be an appropriate legal or business practice. The Hartford assumes no responsibility for the control or correction of hazards or legal compliance with respect to your business practices, and the views and recommendations contained herein shall not constitute our undertaking, on your behalf or for the benefit of others, to determine or warrant that your business premises, locations or operations are safe or healthful, or are in compliance with any law, rule or regulation. Readers seeking to resolve specific safety, legal or business issues or concerns related to the information provided in these materials should consult their safety consultant, attorney or business advisors. All information and representations contained herein are as of January 2024.
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The Hartford’s Global Insights Center team provides analysis on macroeconomics, geopolitics and sectoral risks. The team consists of:
Shailesh Kumar, Head of The Hartford's Global Insights Center
Puneet Bhasin, Senior Economist
Ben Wright, Principal U.S. Economist
Jeffrey Woodruff, Country and Credit Analyst