The early returns from Black Friday sales indicate that consumers are neither down nor out. Still armed with “excess savings” that arose when government pandemic relief checks hit bank accounts from 2020 to 2022 but a bit more discerning about prices than usual, buyers are still shopping. More sales activity usually translates to happier times, something that may come as a surprise considering 2022’s myriad economic challenges.
Yet when looking through the economy’s keyhole, there is another piece of data adding to the happy side of the ledger. This concerns the cradle of capitalism: new business startups.
BLACK FRIDAY SHOPPERS SPEND OVER $9 BILLION IN ONLINE SALES DESPITE INFLATION
Business formations are occurring at a high pace, according to a Census Bureau report for October. New business applications hit 432,000, up 1.2% from September and maintaining a monthly level of 400,000 or more since mid-2021. This compares with 261,000 jobs added in October.
Let’s slow down for a minute and think about what this could mean. Each one of these new businesses must involve at least one person, so across the last 12 months, more than 4.8 million people have become at least partly employed in a new business. During that same period, some 4 million were added to the nation’s employment payrolls.
Even though new business owners may be counted when payroll employment is measured, there are still more people involved in opening new businesses than finding new jobs. Some of these new enterprises may be one-person contracting enterprises for DoorDash or Uber. Others may be financial services startups with multiple workers on the payroll. In any case, expanding businesses adds to the economy’s supply side, and that tends to counter demand-driven inflationary forces.
We must recognize that there is no regular count of the number of businesses that close each month, and thus no net new business number. But the census data do enable us to compare startup numbers across time, learn which regions are most fertile for new businesses, and see which sectors startups are happening in.
Looking back at 2018, 2019, and 2020, before the pandemic, new business applications were running apace at 300,000 monthly, which was somewhat higher than the years before. We have not seen anything like the current multiyear explosion since the reports began in 2011. In ways large and small, millions are optimistic enough to start new businesses in uncertain times. Is this something to smile about or what?
The South, with expected growth of 2.5%, leads the pack, followed by the Midwest with 2.2%, the West with 2%, and the Northeast losing with a negative 1.6%. As for economic sectors, retailing tops the growth list, followed by transportation and warehousing, administrative and support, accommodation and food service, and finance and insurance.
The data help us appreciate the dynamics of the economy as it adjusts to the pandemic shutdown and restart, a resulting resettlement of cities and regions, and, of course, an effort by the Federal Reserve to deal with inflation. As it turns out, some seasoned Fed watchers are now suggesting that the December Fed meeting could deliver lower interest rate increases — perhaps a 50-basis-point increase rather than another 75-point increase.
As we look through the economy’s keyhole, we can see things that disturb and inspire us. Reason and common sense tell us that surging new business startups are a good sign nestled among the more troubling ones. Let’s hope the economic engine is experiencing a gear shift, from low to cruise.
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Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University, a dean emeritus of the Clemson College of Business and Behavioral Sciences, and a former executive director of the Federal Trade Commission.
