Entrepreneurs undeterred by inflation and recession fears

One of the silver linings of the Pandemic was an explosion of start-ups throughout the nation. After a forty-year decline, entrepreneurship rose from the ashes, and contrary to expectations continues to thrive today. What is behind this trend?

In 2020, the early days of Covid-19, as unemployment skyrocketed and businesses shut down by the thousands, 4.3 million new business applications were filed, according to the U.S. Census Bureau. That was one million more than in 2019.

The following year (2021), 1.8 million companies were formed, which was a record. Last year, the numbers dropped a little to 1.7 million applications, but still up 28% from the pre-pandemic days. Funny enough, the worst event of the last 100 years, COVID-19, was the trigger for this economic renaissance.

The pandemic was an unparalleled global catastrophe. As such, some of those pandemic start-ups were born out of necessity. The U.S. unemployment rate hit double digits. More than 30,000 businesses shut down. Waves of unemployed, with no prospect of finding another job in the lockdowns that swept the nation, started a business simply to survive.

At the same time, a surge in migration out of the infected urban centers to more rural, less populous areas, resulted in a surge in business start-ups. At the same time, the trend in work-from-home exploded.

Professional and technical services were two of the top sectors where entrepreneurs staked a claim, accounting for 23% of the net increase in all start-ups, according to the Economic Innovation Group (EIG), a Washington-based think tank. Another area that blossomed was support services for the elderly and disabled, a demographic group that was devastated by the virus. That area experienced a 13% growth rate.

One of the reasons that galvanized entrepreneurs of every age to try their hand at a new business was a decline in the barriers to entry. It turned out that starting a new business on the internet, for example, was much easier than they were back in the Financial Crisis of 2008. Entrepreneurial neophytes planning business startups now have widely available broadband, even in many rural areas. There is also a much greater digital fluency in all things internet, and a mature and dynamic e-commerce marketplace. Those strengths make website creation, marketing, and online sales far easier to establish.

I should also give the government its due in its response to the economic fallout created by Covid-19. The Pandemic relief checks, for example, went a long way in providing the seed money for many of these new ventures. Of course, we now blame the government for spending too much during this period and igniting inflation, yet no one I know has offered to refund those checks to the federal government.

The question is whether the pandemic fallout has somehow reinvigorated the creative juices of all these modern-day Horatio Algers, or is this just a flash in the pan?

The relative steadiness in new business applications since 2020 indicates that this trend may be here to stay. When one looks at all sectors, rather than just those that were booming during the pandemic years, we find start-ups rising across most sectors.  Only four out of 19 sectors, according to the Census Bureau, saw 2022 applications below pre-pandemic levels.

Across the nation, the Southern U.S. is experiencing the largest boom in start-ups, while the Northeast has the smallest.  It is also encouraging that entrepreneurs were able to shake off the impact of a spike in inflation and threats of recession throughout last year. What we don't know is how many of these new businesses are simply part-time, side jobs earning a few bucks to supplement existing salaries.

As a guess, a survey conducted by Venture Forward, a multi-year research program from GoDaddy to quantify entrepreneurial activity, indicated that roughly 39% of micro business founders said their enterprise was a supplemental source of income. However, 67% of them would like to see their start-up become their full-time job.

The key to a flourishing future economy is greater economic dynamism. Those entrepreneurs that can flourish by providing new jobs, greater innovation, and productivity advancements could drive this nation's long-term growth.  We could be on the verge of a much-needed shot in the arm from this group. I am betting on their success, how about you?

Bill Schmick is registered as an investment advisor representative of Onota Partners, Inc., in the Berkshires.  Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. (OPI).  None of his commentary is or should be considered investment advice.  Direct your inquiries to Bill at 1-413-347-2401 or e-mail him at bill@schmicksretiredinvestor.com .Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.