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Home > Coronavirus > Turning to self-employment: Business formation surges amid pandemic

Turning to self-employment: Business formation surges amid pandemic

Oct. 27, 2020 by Joseph Brusuelas

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Nine months into the era of pandemic economics, it is clear that small firms that provide services in transportation, leisure, hospitality, food and beverages are taking it on the chin.

Many workers who have been laid off are turning to self-employment.

According to the Opportunity Insights economic tracker, the number of small firms has fallen 24.1% from January and revenues for those firms has dropped 23.2% over that same period.

The combination of the impasse on another round of fiscal aid and the magnitude of the economic shock implies that many of those firms are simply never coming back.

It is not surprising that many workers who have been laid off are turning to self-employment, resulting in the largest increase in business formations over the past decade.

Entrepreneurial spirit

This go-it-alone spirit seems to be the impetus for an unexpected increase in business formation during this recession. While this will not likely prove to be a major catalyst for a quicker or broader recovery, it will spur activity in the next expansion or the expansion after next.

This is the entrepreneurial drive that underscores market economies. In our estimation, it will set the stage for further integration of advanced technology into the production of goods and provision of services that adds value to manufacturing, tech and life sciences, and will be the core of the next recovery and expansion.

The pace of business formation has far exceeded that of the Great Recession.

According to census data, nearly 1.6 million applications for business formation were filed in the second quarter. That’s about double the applications filed at the start of the year.

The Census Bureau’s weekly data indicates that business formations were growing by more than 80% compared to July 2019, and have decelerated to about 50% in recent weeks. Such a high level in the middle of a recession is out of character compared to business formations during the Great Recession in 2008-09.

We think that one reason why business formations remained weak in the aftermath of the financial crisis was the origin of the shock — the financial sector — and the significant loss of wealth that followed across the broad American middle class, which stimulated a multiyear period of deleveraging.

This economic shock, by contrast, originated in the health care sector of the real economy and has primarily been borne by renters and those who depend on person-to-person social and economic interaction in their jobs.

The census data stresses that not all businesses survive, and there is no argument there. But what is encouraging is that people are willing to take risks and put it all out there – whether or not they have nothing to lose.

Bankruptcies increase

At the same time, the rate of corporate bankruptcy is growing again, according Bloomberg’s index of corporations with liabilities of at least $50 million. Bankruptcies tend to lag the onset of recessions by several months, so it is likely that we have not yet observed the worst of the bankruptcy data.

As bankruptcies lag, policymakers and investors should anticipate the numbers to increase once we have data on the mom-and-pop establishments and the multitude of restaurants with no customers and months of rent in arrears. This will likely spur further risk taking on the part of former employees and suppliers who decide to go off on their own.

For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.

 

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Filed Under: Coronavirus, Economics Tagged With: bankruptcies, business formations, coronavirus, Covid-19, Joseph Brusuelas

About Joseph Brusuelas

@JoeBrusuelas

Joe Brusuelas, “chief economist to the middle market,” is the preeminent voice championing issues and policies facing midsize companies in the United States and around the world. An award-winning economist, Brusuelas has more than 20 years’ experience analyzing U.S. monetary policy, labor markets, fiscal policy, international finance, economic indicators and the condition of the U.S. consumer.

A member of the Wall Street Journal’s forecasting panel, Brusuelas regularly briefs members of Congress and other senior officials regarding the impacts of federal policy on the middle market and the factors by which middle market executives make business decisions. He also frequently offers his insights on the U.S., Canadian and global economies in the financial media. In 2020, he was named one of the 100 most influential economists by Richtopia.

Before joining RSM in 2014, Brusuelas spent four years as a senior economist at Bloomberg L.P. and the Bloomberg Briefs newsletter group, where he co-founded the award-winning Bloomberg Economic Brief. Earlier in his career, he was a director at Moody's Analytics covering the U.S. and global economies for the Dismal Scientist website. He also served as chief economist at Merk Investments L.L.C. and chief U.S. economist at IDEAglobal.

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