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Business formation is booming

Census data on applications to start a business

What do conditions look like for business owners? It’s a complicated question. On the pessimistic side, inflation remains elevated and supply chains are still working their way back to pre-pandemic levels (though both have seen improvement in recent months). Labor markets are historically tight, and interest rate increases over the previous year have raised borrowing costs. Add that to broader uncertainty about the near-term economic outlook, and it’s easy to see why the NFIB’s Small Business Optimism Index has been below its 49-year average for 17 consecutive months.

Yet more people than ever are starting businesses in this environment, according to the Census Bureau’s Business Formation Statistics. Tracked since 2006, these data show the number of applications for an Employer Identification Number (EIN), which is a unique federal tax identifier linked to wage-paying businesses. (Sole proprietorships with no employees often don’t have an EIN.) In this dataset, the Census Bureau categorizes some business applications as “high propensity,” which have a high rate of leading to a business with a payroll. Manufacturing, retail, healthcare, and food service all fall under this category.

Applications for all businesses rose from a seasonally adjusted average of 200k per month to just over 300k per month during the 2010s. For the past two years, they’ve held steady at over 400k per month. High-propensity applications have seen a similar increase: After staying below 100k per month for the 2010s, they’ve been above 130k for the past two years.

It’s likely these increases reflect shifting economic conditions in the wake of the COVID-19 pandemic, and additional research could help us better understand how and why they’re occurring. For now, it’s enough to know that some business owners feel that conditions are tough, while others are taking this moment to launch new businesses.

How this graph was created: Search FRED for “Business Applications: Total for all NAICS.” Use the “Add Line” option to and search for and select “High-Propensity Business Applications: Total for all NAICS.”

Suggested by Nathan Jefferson.

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