By Kenan Fikri and Daniel Newman

Americans filed 5.5 million applications to start new businesses in 2023, nearly 1.8 million of which are highly likely to hire employees. Both figures are series highs, slightly surpassing 2021's banner year when the disruptions wrought by the pandemic pushed early-stage entrepreneurial activity to its prior record.

The latest data from the U.S. Census Bureau's through December 2023 provide further evidence that the background rate of startup activity in the U.S. economy has settled at much higher levels than before COVID-19 struck. In total, 484,000 more likely employer business applications were filed in 2023 than in 2019, an increase of 37 percent. Last year's haul was also 8 percent higher than 2022's.

Monthly applications trended upwards over the year and peaked in September, the best month since May 2021. Just over 6.3 million likely employer applications have been filed cumulatively since the start of the pandemic.

Industry

Entrepreneurs are filing new business applications at an elevated pace across nearly every sector of the economy. Among major industries, the largest increases relative to 2019 (pre-pandemic) are in the accommodation and food services (+66 percent), retail trade (+55 percent), and health care and social assistance (+45 percent) sectors.

The industry sectors driving the startup surge have changed over time. While transportation and warehousing is cycling down after an early pandemic-era boom, entrepreneurial activity in accommodation & food, retail, healthcare, and construction ramped up in 2022.

Geography

The number of likely employer applications rose in every state last year except Alaska, Mississippi, and Kansas. Colorado and Wyoming registered the biggest upticks with the quantity of applications rising by more than a quarter (as a favored state for business incorporation alongside Delaware, Wyoming often leads the pack).

Compared to 2019 levels, the startup surge has been led by two clear belts of states in the Mountain West and Southeast, respectively. Arizona, Colorado, New Mexico, and Wyoming all saw at least 50 percent more new likely employer business applications filed in 2023 than they did in 2019. The same goes for Alabama, Georgia, Mississippi, and South Carolina in the Southeast. Indiana and Delaware round out the list of states where new business activity has risen by at least half over the past five years.

In some respects, this geography of the startup surge tracks with broader patterns of economic growth. States such as Georgia and Colorado lead the nation on indicators of population growth and economic dynamism. In other cases, the surge may be a function of more subtle demographic or socioeconomic factors. Mississippi and New Mexico are both high-poverty states that perform poorly across measures of economic dynamism. In these areas, the observed increase in business applications is likely driven by a different set of factors than the increase in more opportunity-rich areas, just as the strong performance of Wyoming and Delaware are more a function of state corporate law than their economic fundamentals.

The resulting geographic diversity of the startup surge suggests that it is far from a uniform phenomenon, even though it was catalyzed across sectors and geographies around the same time. Instead, the startup suge is both powered and shaped by numerous local forces and policies that will affect its long-term economic impact on communities, as well.

For more 91PORN analysis and interpretation of the startup surge, see:

• The Startup Surge Continues: Business Applications on Track for Second-Largest Annual Total on Record

by Daniel Newman and Kenan Fikri

The country's business startup rate, measuring the share of all firms that form each year, ticked up to 8.9 percent in 2021—the highest share since the Great Recession. In total, more than 476,000 new startups formed, which is nearly a 5 percent increase relative to before the pandemic and a promising sign that the ongoing surge in new business applications is translating into real business formation. These figures come from the latest release of the U.S. Census Bureau's (BDS), which establishes the most definitive baseline trend in business formation.

The new data provides one of the first authoritative looks at just how economically significant the pandemic-era jump in new business applications might turn out to be. (The U.S. Census Bureau provides data on business applications, or applications for Employer Identification Numbers (EINs), via their (BFS) series; the "startups" captured here represent the subset of those applications that actually go on to launch and hire.) The long lag time between applying to start a business and actually becoming operational, however, means that this latest data (for 2021, but technically referencing March of that year) gives us only early hints as to how extensively the flood of new applications starting in mid-2020 translated into new businesses. Historically, the vast majority of business applications never become operational, so any resulting increase in the number of startups will only ever be a fraction of total applications. For instance, the number of new business applications surged by over 50 percent between 2019 and 2021, but a comparable swell in the number of startups over this time period would be extremely unlikely. What is more, application trends exhibited two distinct phases: an initial jump immediately associated with the pandemic, and then a longer, more stable, and more sustained increase in the years that followed. The 2021 BDS data gives us some evidence on the translation rate of applications to enterprises from the first phase, but it cannot yet say anything about the second.

Importantly, the latest data offers grounds for optimism that the number of startups should continue to grow at higher rates than before the pandemic given the sustained, elevated level of applications that has continued through 2023. The latest startup rate is therefore meaningful because it provides concrete proof that American entrepreneurship is quite likely on a new path away from the doldrums of the 2010s, when new business formation lingered near historic lows. 

The startup rate ticked up to its highest level since the Great Recession, but firm closures also accelerated amid economic churn.

The startup rate in 2021 saw its largest year-over-year increase in nearly two decades, reaching 8.9 percent after essentially remaining unchanged for the prior five years. At the same time, however, the firm closure rate—the share of businesses that ceased operations in a given year—increased to 9.0 percent as businesses across the country reckoned with new economic realities brought about by the pandemic. This means that the increase in startups was effectively entirely offset by the increase in firm closures, resulting in little net change in the number of firms in the U.S. economy. An important caveat, though: The closure rate for the most recent year tends to be the noisiest and least reliable indicator in the BDS dataset. This is because businesses often close quietly, taking time to exit administrative datasets; the widespread temporary closures of businesses associated with the pandemic surely made the task of estimating total closures even more difficult.  

The margin between the startup rate and the closure rate has much to reveal about the nature of pandemic-era business dynamism and how we should interpret it. The two measures symbolize the opposing yet complementary forces of creation and destruction. If the two forces are in balance, the increase in startup activity may demonstrate productive adaptation to the shocks of the pandemic, as the economy reallocates resources towards more productive endeavors amid changing economic circumstances. By contrast, if the startup rate healthily outpaces the closure rate, the surge may be more readily interpreted as a step-change increase in the country's entrepreneurial tendencies. 

Both scenarios are positive—heightened churn alone could help explain how the U.S. economy navigated the pandemic disruptions so seamlessly and emerged with such strong and healthy growth on the other side. However, a wider margin that provided evidence of a more sustained and structural shift towards greater entrepreneurship would be especially welcome given the doldrums in which entrepreneurship languished throughout the 2010s. Only with additional years of data will we be able to more conclusively characterize this period.  

The pandemic did little to change the geography of American startups.

States in the South and West led startup formation in 2021, mirroring the elevated rates of business applications that have appeared in many of the same communities over the past three years. In general, startup rates tend to be higher in places experiencing strong population growth (new residents mean new workers, customers, and business opportunities). 

The states with the highest startup rates were: Florida (11.7 percent), Nevada (11.4), Utah (11.1), Georgia (10.7), and Delaware (10.6). The ten best-performing states remained the same relative to before the pandemic, although the rankings shifted somewhat. Georgia moved up the most, jumping from the ninth-highest startup rate in 2019 to fifth place in 2021. Startup rates tend to be higher in metropolitan areas than in rural ones, and—despite the increased population growth enjoyed by many rural areas during the pandemic—the metropolitan startup rate increased (8.6 percent to 9.0 percent) by substantially more than the non-metropolitan one did (6.3 percent to 6.5 percent). 

Regional startup strength can be seen at the metro scale, as well, with the leading startup economies heavily concentrated in Florida, Texas, Georgia, and the Mountain West. Nearly every major metro area in Florida, for instance, can call itself a startup leader in 2021., while fast-growing places in the Mountain West similarly dominate, led by Las Vegas, Phoenix, Boise, and Provo, UT. Except for Dover, DE, which sees elevated business formation rates due to advantageous incorporation laws in the state, no major metro area in the Northeast or Midwest exceeded the national startup rate.

The transportation and warehousing industry extended its lead as the sector with the highest startup rates despite the changing economic landscape of the pandemic era.

The transportation and warehousing sector registered the highest startup rate (15.2 percent) as well as the largest increase relative to its 2019 prepandemic rate. That increase reflects the strong growth in applications the sector recorded in the BFS data in the early stages of the pandemic as well. To be sure, the transportation sector was a startup leader even under normal conditions as it serves as the economy's lifeblood, leading the integration of the physical and digital realms, serving e-commerce, delivery, and numerous other internet-powered transformations. But the sector took on new importance as the demand for home deliveries and places to store goods rocketed upwards. At the other end of the spectrum, the heavier, capital-intensive mining, manufacturing, and utilities sectors registered the lowest startup rates. 

The share of total employment in startups reached its lowest point on record, reflecting a long-term trend toward startups with fewer employees.

New firms employed 1.7 percent of all U.S. workers in 2021, a figure that ticked down to its smallest share on record and extended a long-term decline that set in during the late 1980s. Startups have been trending toward over time, consistent with what one might expect with the growth of new digital-native businesses, as well as a result of changes in productivity, industry mix, and outsourcing. Thus, even though the country launched about 22,000 more startups last year than in 2019, their employment footprint was significantly smaller (by around 250,000 jobs). This could reflect the difficulties in ramping up employment amid the pandemic's labor market disruptions or differences in the nature of enterprises launched before and after the pandemic, and it is reflective of long-term trends. 

Conversely, the share of all American jobs now housed in older firms (defined as those at least 16 years old) reached an all-time high in 2021, surpassing the three-quarters mark for the first time and underscoring some of the ambiguous impacts the pandemic had on American economic dynamism. 

Uncertainty remains around the economic significance of the startup surge. 

This release of 2021 BDS data provides the first major indication from the gold-standard dataset on business dynamism of how real the pandemic-era surge in new business applications is and how economically significant it may prove in terms of true employer startups and all the job creation and pro-innovation, -competition, and -productivity effects they entail. The latest figures show dynamism stirring and the rate and volume of startups rising well above the lows that set in after the Great Recession; yet, the healthy bump in startups in 2021 looks modest relative to the dramatic spike in total applications to start new enterprises. The fact that initial estimates have firm closures netting out firm starts also adds ambiguity to the picture. Timing remains an important variable, as new research from John Haltiwanger and Ryan Decker notes how the characteristics of startups from the initial wave of applications during the economic tumult of mid-2020 (likely captured in the BDS data discussed here) may be quite different from those started in 2021 and onwards once people had more clarity around the economic realities of a post-pandemic world. More recent datasets, including the Bureau of Labor Statistics' Business Employment Dynamics, all point to a continued, meaningful surge in employer enterprises that is only beginning to register in the window analyzed here.

Thus, the trend is positive, and the open questions are around the magnitude and meaning of the startup surge, not whether it is happening. As we wait for more data to fill in the picture, 91PORN will continue unpacking the latest estimates to help our audiences understand and interpret one of the most intriguing economic stories of the 2020s.

Trends and Expectations in America’s Small Business Sector

by Daniel Newman and Vera Chaudhry

The Census Bureau’s provides regular insights into current small business conditions along with expectations about performance six months into the future. This post highlights some of the major trends and expectations reported by the small business community in July 2023, covering a one-year period since the debut of the survey last summer.

After being weighed down by economic forces for much of last year, the small business sector appears ready to shake it off this summer, as can be seen in improved national economic indicators. Across the United States, more than 33 million , defined as those with under 500 workers, employ just under half of the country’s workers and inject vital energy into local economies. Even if they aren’t totally out of the woods yet, the increasing possibility of a “soft landing”—in which inflation comes down without a significant increase in unemployment—is providing some optimism to small businesses across the country.

Inflation and supply chain concerns have eased postpandemic-era problems, helping small businesses.

Many small businesses suffered through last year’s cruel summer thanks in part to decades-high inflation and lingering supply chain issues, but those concerns appear to be abating recently. Critically, the cost of doing business is becoming more manageable for both consumers and businesses as inflationary pressures continue to come down. Just 15 percent of small businesses increased the prices they charge customers for goods or services in recent weeks, which is nearly halved from the share reported last year during the inflation surge. At the same time, more than four out of five businesses left prices unchanged in late July, reaching the highest share reported yet in the survey.

On the other side of the ledger, the share of businesses reporting price hikes for the items and services needed as inputs for their operations dropped nearly 25 percentage points since last summer, reaching just 38 percent in the latest figures. In a similarly encouraging sign, more than half of businesses are reporting no increase in costs at all—much improved from last summer when only about one-third indicated stable prices.

The latest survey results should also allay some concerns that continued price increases might become ingrained into the expectations of consumers and businesses. Looking six months into the future, the share of businesses expecting to raise prices has steadily decreased since last summer: just 29 percent indicated they plan to raise prices on the goods or services they provide—a low point in the survey and down significantly from last summer when nearly 45 percent expected to do so. The outlook for input prices has likewise improved, with the share of small businesses anticipating price stability six months in the future rising to half compared with 30 percent last summer.

Supply chain issues are swiftly receding into the rear view mirror as well, with a survey-high 80 percent of small businesses reporting no delays due to suppliers, production, or the ability to get their goods to consumers in a timely manner. This is a stark turnaround from last summer, when 56 percent of respondents reported no such issues.

Hiring remains stubbornly difficult for some small businesses, but concerns are diminishing.

Hiring concerns among small businesses have lessened recently, a trend consistent with a labor market that appears to be after pandemic turbulence. Even so, hiring for some positions remains difficult due to the fact that unemployment is historically low and there is still a very tight job market with for every unemployed worker, a ratio that remains well above levels seen in the years immediately preceding the pandemic. As reported in the June , an overwhelming majority of businesses looking to hire employees had difficulty finding qualified applicants—if any applied at all.

Indeed, about 18 percent of small businesses reported some difficulty finding the one they need for the job in recent weeks, a share that has ticked down from over one-quarter last summer. The outlook seems to be improving, though, as the share of businesses concerned about hiring in the future has also dropped 10 percentage points from last summer to 27 percent, roughly equaling those who have no concerns about future hiring.

Summer heat is appearing to take a toll on consumer behavior across several major metro areas.

A large swath of America has a problem with extreme heat this summer, and many businesses have reported a decline in patronage as people seek to avoid time outside. In heated metro areas, larger shares of businesses reported a decrease in consumer demand—and thus revenue—over the course of July relative to other parts of the country. A staggering 40 percent of small businesses in Riverside, CA, reported a fall in sales on average in July when the average high temperature there neared 100 degrees (which is relatively typical for the month). By contrast, only about one-quarter of small businesses in St. Louis and Boston reported a decline in demand over the same period—places where the average high temperature was 10-20 degrees cooler this July.

As many small business owners know all too well, extreme weather can have dire consequences for their operations and even survival. Heat in particular is increasingly becoming a business concern, even in large, dynamic economies like where residents are opting to remain indoors due to extreme temperatures. In tourism-dependent communities, weather-related economic effects can be devastating, as visitors cancel plans and a limited supply of workers can make rebuilding highly expensive—problems that communities across have recently found in the wake of intense flooding this summer. At least in the near term, labor shortages and price increases will impede small businesses’ recovery in communities affected by such extreme weather events.

As businesses enter their postpandemic era, many expect relative stability in the coming months.

A healthy and stable small business sector remains essential to a strong U.S. economy, and current sentiment provides encouraging evidence that it is on firm ground. The national small business landscape appears to be stabilizing into what is considered normal operating conditions, with an increasing share of business owners reporting “average” performance over the course of this year. The increase largely came from fewer businesses claiming “excellent” or “above average” performance, suggesting that what may have been impressive a year ago is now the norm. At the same time, the share reporting “below average” or “poor” conditions has remained steady over the past year, hovering around one-fifth of survey respondents.

Despite increasing interest rates and that make it more expensive and more difficult to take out loans, there are promising signs that the small business sector increasingly expects steady economic conditions for the foreseeable future. Just over two-thirds of respondents expect that demand for their goods and services will remain strong through the end of the year—up nearly 10 percentage points from last summer.

Overall performance varies across industry sectors, however, and improvement in overall conditions has been strongest in the accommodation and food services sector, where those reporting “below average” or “poor” conditions shrank by 5 percentage points from 28 to 23 percent. By contrast, large companies in the tech sector have gone through several rounds of layoffs over the past year, apparently affecting the overall performance of businesses in the information sector downstream in smaller firms. Those businesses reported a modest increase in overall negative conditions, rising from 24 to 29 percent between July 2022 and July 2023. The real estate sector also appears to be feeling the pressure of increased interest rates that has cooled the housing market in many places. While the sector reported just 15 percent with poor or below average conditions last summer—the lowest share among sectors at the time—that has increased to 23 percent this July, which is now slightly higher than the typical sector.

by Daniel Newman

Key Findings

• Over the first six months of 2023, applications to start a business likely to hire employees outpaced last year's first half-year amount by more than 7 percent. Assuming the current trend holds, then this year's annual total should be just shy of 2021's record amount.
• Nearly 871,000 likely employer applications have been filed so far this year—a 36 percent increase over the prepandemic half-year baseline—and the second largest midyear total on record.
• The business application surge remains broad-based across most industry sectors, with the strongest year-over-year growth in healthcare, retail, arts & entertainment, and accommodation & food services.
• The leading communities for growth in new business formation are overwhelmingly in the South, a region home to seven of the top ten states for total business application growth since 2019.

Early-stage business activity across the United States remains robust through the first half of 2023, as the pace of new business formation actually strengthened over last year. Individuals filed nearly 2.7 million applications to start a business between January and June of this year, a 5 percent increase over 2022 and a staggering 52 percent increase over the same period in 2019. One-third of those filings were for new businesses likely to hire employees—a key subset of applications from the Census Bureau's demonstrating a "high propensity" to hire staff, if and when the business becomes operational. The volume of likely employer applications also remained well above prepandemic levels, surpassing the total from the first six months of 2019 by 36 percent. Startups and young companies—particularly those likely to hire employees—play an outsized role in job creation and wage growth.

The pandemic jump-started a promising period of strong business formation across the United States, and the increased activity shows no sign of abating three years on. Business applications serve as a timely and forward-looking indicator of economic activity and growth. However, it typically takes several months for an application for a new Employer Identification Number (or EIN, the underlying variable tracked in the data) to actually turn into a new business, and typically complete the journey. For instance, Census projects that about 9 percent of all applications filed in June 2023 will eventually become operational within the next two years.

Here we highlight several major takeaways for business formation through the first half of 2023. We focus on applications from likely employers because of their crucial role in job creation. We make most comparisons to 2019 in order to explicitly highlight how the pandemic-era economy has dramatically differed from prior trends up to 2020 when the pandemic hit, and to emphasize the staying power of the startup surge.

Business formation took a hit following the Great Recession and never fully bounced back—until the pandemic led to a gravity-defying jump that has entered its third year. In the first half of 2023, individuals filed nearly 871,000 applications to form businesses likely to hire employees, the second largest level on record. The surge has stood firm against both inflation and recession fears—and even a banking crisis—such that likely employer filings are up more than 7 percent for the first half of this year compared to last. Assuming this trend holds, then the annual total is on track to be just shy of 2021's record amount. That year's total was supercharged by a wave of adjustments across industries and business models and a surge in Americans striking out on their own as the country adapted to the pandemic shock.

The durability and growth of the startup surge is quite striking. Just over 145,000 applications were submitted each month this year on average after adjusting for seasonal variation—an increase of about 40,000 per month relative to prepandemic levels. The consistency in application levels exhibited over the course of 2023 offers further cause for optimism that the pandemic may have delivered a lasting, positive shock to American entrepreneurship. All together, more than 5.4 million applications to form likely employer businesses have been filed since the onset of the pandemic, and over 16.6 million applications in total when including solo enterprises and non-employers—more than in the five years before the pandemic combined.

The new business surge applies to nearly every major industry sector, but not all have seen an increase since last year.

The new business surge remains broad-based across sectors, and many major industries are even up relative to the first six months of last year. Despite the economic upheaval, the top 10 industries with the most applications have managed to remain unchanged since before the pandemic (although the rankings have been slightly reordered). The biggest gainers since last year were in several areas of the economy highly affected by the changing preferences and habits of consumers over the course of the pandemic:

• Healthcare and social assistance applications rose by 15 percent over the first six months of 2022—the biggest year-over-year increase among major industries. The sector is also up by 52 percent relative to 2019, holding steady with the third largest share of applications (13.5 percent).
• Retail trade grew 11 percent since last year and is the fourth largest sector, making up just under 12 percent of likely employer filings.
• Arts and entertainment businesses similarly increased by 11 percent over last year's filings, as people have flocked to in person activities postpandemic, but the sector represents a relatively small share of overall applications at less than two percent.
• Accommodation and food services, by contrast, makes up the largest share of all likely employer applications and grew by 11 percent over last year's numbers. Consumer demand for travel and dining out continues to propel growth in this sector, and it also boasts the largest gain relative to 2019, growing by 66 percent.
• Construction applications grew by 9 percent since 2022, and is the second largest sector by volume of applications (138,300, or 16 percent of likely employer filings). Filings remain up by about one-third over prepandemic levels, likely related to the high level of in recent months.

For all these consumer-facing sectors, it remains to be seen what share of these applications for new businesses have off-setting firm closures elsewhere in the data, as economic activity adapts to different business models or reallocates to new locations (e.g., away from downtowns). Regardless of the magnitude of this type of reallocation, other sources of data on firms and establishments point to a large net expansion in enterprises since the onset of the pandemic. Yet even as growth in many sectors continues, interest in a few key industries has notably cooled this year:

• Real estate sector applications have declined by 10 percent relative to the first six months of 2022. Rising interest rates have made mortgage payments more expensive, somewhat dampening the supply and demand for housing, potentially contributing to this industry's dropoff.
• Despite an uptick in manufacturing investments in parts of the United States, new business filings in the manufacturing sector dropped 8 percent so far this year. Manufacturing only makes up a tiny portion of the likely employer filings (2 percent) and generally has a low startup rate due to its capital intensive nature and dependence on economies of scale that benefit large, incumbent firms.
• Transportation and warehousing—a prime example of a sector that boomed during and after the pandemic—remains 41 percent above 2019 levels, but the year-over-year change is decidedly downwards, falling 7 percent relative to the first half of last year. The earlier growth recorded during lockdowns and more widespread reliance on remote work led to a surge in the need for delivery services and locations to store goods, but the sector appears to be stabilizing after an impressively rapid era of adaptation and build-out.

Southern communities are leading the pandemic-era surge in new business formation, both in terms of overall growth and on a per capita basis.

Business application growth for the first half of this year continues to be strongest in the South, home to seven of the top 10 states with the largest increases since 2019. More granular data at the county level is available for total applications (rather than for likely employers) but only through the end of 2022. In general, county-level patterns reflect trends seen at the state level, with some of the biggest county-level increases in percentage terms seen across a band of southern states stretching from Mississippi to North Carolina. Much of the Mountain West also stands out for its above average performance.

A persistent, open question, however, is why a large swath of the South has recorded some of the highest growth in recent years. In general, most business applications tend to be filed in places where lots of economic activity occurs—in populated urban areas and the surrounding metros—yet some of the strongest pandemic-era growth has been outside of these traditional hubs. Population growth, which has been particularly robust in parts of the South and West, can be a key ingredient for business formation, but many of the top-performing counties are actually quite rural with low populations and unremarkable recent population growth rates. Some of the leaders are likely advantaged by starting from very low bases, and indeed poverty rates and minority shares of the population are some of the strongest correlates with business application growth. Perhaps the economic, fiscal, or policy shocks related to the pandemic helped motivate or make possible entrepreneurship among certain demographics disproportionately. At this point, it is impossible to tell with available data, and the inability to differentiate between likely employer and likely non-employer applications at the county level limits our understanding further.

Another way to put the surge into fuller context is to look at the rate of filings relative to a county's total population, which helps tease out which places exhibit a relatively higher propensity for starting new businesses. Mapping the number of total applications per 10,000 residents confirms just how much more startup-oriented parts of the South and West are relative to large swaths of the Midwest and Appalachia. For example, even though the number of applications in many West Virginia counties grew significantly relative to 2019, the per capita numbers remain among the lowest in the country.

The map further illuminates how much of a hold metropolitan centers still have on American entrepreneurship. Take Georgia, for instance, where the per capita leaders are overwhelmingly in the populous Atlanta metro area, led by Fulton (466 per capita) and Clayton (397 per capita) counties—rates in some cases that are nearly six times higher than in the state's more rural northwestern and southern counties.

Despite unanswered questions, the persistently elevated level of business applications is a promising sign for U.S. dynamism and entrepreneurship.

Three years since the pandemic jump-started a wave of business activity across the county, two big questions remain: how many of these new business applications will indeed turn into genuine employer enterprises, and how economically significant will they be? Some answers to these questions will arrive in the fall of 2023, when the Census Bureau releases authoritative counts and employment figures for the firms that started and hired in 2021—the year with the most business applications on record. Yet even those figures will only be best estimates, refined over time as more and better information trickles in on business starts and closures alike.

Regardless, the big question is the magnitude of change, not the direction. have already confirmed that the bump is real. The sustained boost to entrepreneurship observed across much of the country since 2020 should produce a sense of optimism for a healthier, more dynamic economy in the coming years. Historically there is a tight between the number of applications and true business formation, and that business applications are strongly predictive of changes in total U.S. payroll employment about one year down the road—a positive sign for continued job creation in the coming months. Perhaps the surprising strength of the labor market itself offers some proof that the startup surge is real.

by Daniel Newman

The Census Bureau’s provides biweekly insights into the state of the country’s small businesses along with expectations about their performance six months into the future. Across the United States, 33 million employ just under half of the country’s workers. This analysis covers some of the major trends in the small business economy since the survey debuted in the summer of 2022.

Small businesses across the United States reported healthier conditions in recent weeks amid a prolonged period of economic turbulence. Survey results collected by the Census over the first half of March reveal small businesses largely anticipate a rosy economic picture six months into the future, as well—a potential sign of optimism that the economy would manage a soft landing and avoid a much-feared recession. This relatively positive sentiment held even as the Fed continued down its path of monetary tightening, although the latest survey results have yet to reflect the uncertainty injected into the economy by the recent banking crisis and latest Fed interest rate hikes. These developments could make it much to borrow money amid bankers’ moves to and shore up their balance sheets. 

Major pandemic-related difficulties that plagued small businesses last summer have subsided considerably

Many major operational concerns stemming from supply chain bottlenecks are receding into the rearview mirror. The easing of domestic supply chain delays—which affected more than one in three small businesses last July—have seen the most dramatic improvement, now afflicting just one in five. Small business customers have also benefited from fewer production and shipping delays in recent weeks. 

Business owners expect these concerns will continue to fade in the coming months, as 80 percent expect no changes in the amount of time it takes to get materials from suppliers six months from now. In a similarly positive sign, just 11 percent anticipate it will take longer to get supplies six months from now—down by half from last year’s peak and the lowest share yet in the survey.

The search for workers has eased, with expectations for continued improvement in coming months

On the hiring front, improvements largely mirror those seen with other ongoing challenges. A hiring bottleneck that stymied business operations last year has visibly eased, as just over 20 percent of small businesses reported hiring difficulties in the latest survey—down from over one-quarter last summer. The outlook for future hiring activity also appears to be brightening, as just under 31 percent anticipate that they will face difficulties hiring paid employees in the future, a drop of around 6 percentage points since last summer.

Nearly one in five small businesses expect to add employees over the coming six months. At the same time, fewer business owners anticipate needing to shrink payroll numbers or employee hours, a sign that employment levels may tick up across the small business sector in the coming months. Just 7.6 percent expect that they will have fewer employees six months out, and only 10.1 percent think that the number of hours employees work will have decreased—the best results to date for both survey questions. 

As inflationary pressures slowly tick down, fewer cost increases are being passed onto consumers

The effects of stubbornly high price increases on the small business sector are slowly receding, a trend consistent with the economy-wide. Fewer business owners are reporting price increases for their purchases, as well as for what they charge consumers. For the first time in the survey, less than half of small businesses reported facing an increase in the cost of goods and services they must purchase for their operations. Businesses often must resort to passing these costs along to consumers, and the share of businesses resorting to that course of action has also declined significantly since last summer.  

In an important marker that the Fed’s battle against inflation may be succeeding, just over half of small businesses expect to pay more for the necessary goods and services required to operate their businesses in the coming months—a low point in the survey. While still high, this figure is down from two-thirds last summer. This trend is mirrored on the consumer side as well, as the share of small businesses expecting to raise prices on customers six months in the future reached 34 percent, also its lowest point in the series and down from a high of nearly 45 percent in July 2022. 

Expectations of an impending economic downturn have been diminishing as small businesses anticipated steady demand in the coming months

Small businesses appear to be cautiously optimistic about their standing in the coming months, as positive sentiments about future performance hovered near their highest point in the series. The time horizon over which small businesses can confidently plan their operations varies, but most are confident they can predict performance at least 4-6 months out, and nearly two-thirds of small businesses expect future consumer demand to hold relatively steady over that time. This comes as just 13 percent felt that demand would decrease, a significant improvement relative to last summer’s share of 19 percent. These sentiments are shared across most business sectors, where some of the biggest improvements came in sectors such as Arts, Entertainment, and Recreation; Accommodation and Food Services; and Real Estate. 

Small businesses with fewer employees are the least likely to characterize their performance as above average

Nearly one-third of all small businesses are experiencing “above average” or “excellent” performance today—a share that has held remarkably steady since last summer—but there is a notable gap in performance depending on the size of the business. Small businesses with four or fewer employees face the greatest challenges to ensuring their survival and consistently report weaker levels of performance relative to their larger peers. 

A healthy small business sector remains essential to a strong U.S. economy, and current sentiment offers hope that the country is moving in the right direction. Signs of economic overheating are receding while the supply and labor bottlenecks that fueled inflation are also easing. Amid these positive developments, small businesses foresee stability ahead rather than a coming recession that could lead to a dramatic curtailment of economic activity. Questions remain, however, whether inflation will continue to recede and whether the banking sector remains stable going forward.