Small businesses (under 500 employees) are the backbone of the U.S. economy, accounting for nearly all U.S. businesses and almost half (45.9%) of U.S. private sector employees.[1] Business formations (or legal births) are a helpful indicator of job creation and U.S. productivity growth. The 2020 COVID pandemic saw a surge in new business formations, unlike the last major economic disruption experienced in the fall of 2008. Various factors created an entrepreneurship-friendly environment in 2020, which led to an increase in new businesses. The main factors in play included an increase in household wealth due to higher saving rates, government-issued stimulus checks, and more time spent at home. In fact, household real median net worth increased 37% between 2019 and 2022, the largest three-year increase on record.[2] Higher savings allowed entrepreneurs to invest in new businesses, the primary source of financing for most small firms. Along with higher savings, increased lay-off and quit rates occurred, giving people the opportunity and more time to start a business. Data now shows that during the first two years of the pandemic, there was a tight connection between the rise in business applications, leading to business formations, and subsequent quits (or business deaths) both nationally and locally.[3]
Business births have been on the rise, with 5.5 million new legal formations in 2022 (most recent data). This was nearly double that of a decade ago. However, since the steep rise during the COVID pandemic, business births have started to recede from 5.7 million in 2021 to 5.5 million in 2022. The trend is most notable when looking at the data by state. The three states with the greatest number of business births during the pandemic, Florida, Texas, and California, have also seen a recent decline in those numbers.
In 2022, Florida had 669.6K business births, the highest of any state. Second was Texas, with 422.8K births in 2022. This was a slight decrease from the year prior (426.2K). Texas has experienced an increase in its population, as more people move to the state. From 2000 to 2022, Texas has gained over 9 million new residents which is more than any other state, according to data from the U.S. Census Bureau. Texas has some of the most business-friendly policies in the country, attracting new and existing businesses. California ranked third, with 418.9K business births, only 3.9K less than Texas.
Of the top three states, California had the largest decline in business births from 2021 (440K). One of the reasons California is one of the top states for new business formations is because it is the most populous state in the country and has the largest economy in the U.S. (fifth largest in the world). Other states that had over 200K births included Delaware (298.7K), Georgia (266.3K), and New York (258.9K). However, all of these states experienced a decrease in the number of business births from 2021 levels. Relative to their populations, the three most productive states in terms of the number of new firms in 2022 were Delaware, Florida, and Georgia. Delaware was significantly more productive than the rest of the states.
However, most states experienced negative business birth growth from 2021 to 2022. New Hampshire experienced the most significant one-year decline, with a year-over-year birth growth of negative 68.9%. The remainder of the states experiencing negative birth growths were all under negative 20%.
Whether or not the surge in new business formations will continue is unclear, but supporting small business-friendly policies will help these new businesses thrive and may attract new entrepreneurs to enter the marketplace and create jobs. The entrepreneurial spirit is, without a doubt, alive and well, in the U.S.
William Dunkelberg: Chief Economist for the National Federation of Independent Business, where I focus on entrepreneurship, small business, consumer behavior and the economy. I’m also Professor Emeritus at Temple University
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