Despite the slowing economy, applications to form new businesses in the US grew by 1.2% in October, compared to the previous month.
Part of what drives new business formations in sectors is when there are lots of new ideas and new options for growth, said Aaron Terrazas, the chief economist at Glassdoor, a jobs board site. However, “not all businesses are born equal,” he said. “Some new businesses are born of opportunity, some new businesses are born of desperation.”
He pointed out that there was a small boom in business formations during the depth of the Great Recession, as many people who lost their jobs were starting personal fitness training or personal career coaching businesses. During the pandemic, business applications surged, with a Sept. 2021 study finding that most were concentrated in the e-commerce boom, as well as gig workers setting up LLCs to protect themselves from personal liability.
The total number of applications is about the same as the same month last year, but Terrazas said he thinks that there will be a fall in applications in the coming months. The data come from “employer identification numbers” filed with the IRS that are used to identify business entities.
Another factor, which may also indicate economic resilience, is that people have moved up their applications because they want to get their business loans in now before interest rates go up any higher, said Erica Groshen, an economist at Cornell University.
Starting a business during an economic downturn
Despite the slowdown, some good ideas will come out of it—as seen with the founding of household-name companies like Uber and Airbnb, which were born to disrupt the stodgy industries they were in, and came about during the Great Recession. “You do see the seeds of the next kind of boom begin to germinate during these periods of economic crisis,” said Terrazas.
At the same time, startup costs are going to be lower, and entrepreneurs will have an easier time attracting employees. “But the challenge, of course, is that then your customers may not be in a position to buy whatever it is you’re selling,” said Groshen. “So it depends on what you’re selling.” She added that she expects businesses handling bankruptcies to receive some of the new business growth.