Census Report Shows Marginal Decline in Projected Business-Formation Numbers

Small-business owners are feeling ‘more uncertain than ever’ about business conditions, economist Bill Dunkelberg said.

A sign in a small business. Tim Mossholder/Unsplash.com

Applications to set up new businesses declined last month, with projections of future business formation also dropping, according to the latest data from the U.S. Census Bureau.

Business applications for September came in at 426,170, down by 1.3 percent from the previous month, the Census Bureau said in an Oct. 10 statement. The number of projected business formations—new businesses estimated to emerge from these applications—was 28,865, a 0.4 percent decline. Put formally, the bureau is “projecting that 28,865 new business startups with payroll tax liabilities will form within four quarters of application from all the business applications filed during September 2024.”

By region, the number of projected business formations declined the most on a monthly basis in the South, followed by the Northeast and the Midwest. The West saw a marginal gain.

By state, the biggest upsurge was in Vermont. Alaska came in second, and Maine took the third spot. Utah saw the biggest drop, followed closely by Kentucky.

“[Small-business owners are] feeling more uncertain than ever,” Bill Dunkelberg, chief economist at the National Federation of Independent Business, said.

The group’s small-business optimism index remained below the 50-year average for the 33rd consecutive month in September. The uncertainty index rose on a monthly basis to hit the “highest reading” ever recorded.

“Uncertainty makes owners hesitant to invest in capital spending and inventory, especially as inflation and financing costs continue to put pressure on their bottom lines,” Dunkelberg said.

“Although some hope lies ahead in the holiday sales season, many Main Street [business] owners are left questioning whether future business conditions will improve.”

While business-formation numbers look disappointing compared with a year ago, the larger historical picture does not reflect a deeply negative sentiment.

According to data tracked by the Federal Reserve Bank of St. Louis, monthly business formations mostly remained above 28,000 between 2005 and September 2007.

The financial recession that followed led to the numbers dropping to roughly the 21,000 to 23,000 range between 2009 and 2020, for most months.

The COVID-19 pandemic crushed monthly business formations to fewer than 16,000 by April 2020, and the level then swiftly rebounded to peak at 32,500 in January 2021.

Since then, business formations have remained in a range of 27,000 to 32,000 per month.

Business-Formation Trends

Business application numbers are positively related to how many people quit their jobs, according to an Aug. 5 analysis by the St. Louis Fed.

The finding is consistent with a conjecture put forward by economists Ryan Decker and John Haltiwanger that “individuals quit their jobs to start new businesses during the pandemic and Great Resignation period, driving up business formation.”

The strength of this relationship was found to have grown in magnitude between 2020 and 2023 as COVID-19 lockdowns eased, with each year showing a stronger correlation than the previous one.

“However, business applications have remained high through 2024 relative to the 2010s—both on aggregate and within the work-from-home-friendly industries, like professional services, on which Decker and Haltiwanger focused—while job quits have returned to previous levels,” according to the St. Louis Fed’s analysis.

“This suggests that the rise in job quits following the onset of the COVID-19 pandemic (i.e., the Great Resignation) cannot fully explain the persistent increase in applications for new businesses.”

According to a February post by financial services firm The Hartford, while the pace of business formations likely will slow down this year, the growth rate is expected to remain “healthy.” The Hartford calculates a 3.1 percent year-over-year increase in formations in 2024.

The rate of growth is estimated to get back to normal once the COVID-19 pandemic-fueled growth spurt ends. This year could see almost 30,000 new businesses materialize, with industries such as restaurants, hotels, professional services, and health care leading the surge, according to the post.