The Surge in New Businesses Is One of the Big and Surprisingly Sticky Changes Coming out of the Pandemic Economy

And yet, the Pandemic Money is long gone.

By Wolf Richter for WOLF STREET.

New business formations in March, based on applications for a federal Employer Identification Number (EIN) with the IRS, jumped by 4.5% from February, by 10% from the already high levels a year ago, and by 50% from March 2019, according to the Census Bureau today.

The three-month moving average, which irons out some of the month-to-month ups and downs, rose by 3.7% from a year ago, and by 50% from the same period in 2019.

The astounding thing: This is still going on! During the pandemic, the extra money the government was handing out served as startup capital, and with lots of people having lost their jobs, the creation of new businesses exploded. But now all this is gone, and business formations are still 50% higher than they were before the pandemic, and they’re surging again.

Note: You do not need an EIN to be self-employed or to start a business that doesn’t have employees; your Social Security number is enough. You did not need an EIN to get PPP loans; a Social Security number was enough. A business needs an EIN if it pays regular employees, if it is a corporation or partnership, and for some other purposes (trusts, estates, etc.).

EIN applications for trusts, estates, tax liens, etc. are removed from this data. This data here covers only EIN applications for typical businesses.

The big wave since 2020.

Between January 2020 and March 2023, a gigantic 16.1 million businesses were started – testimony of the large-scale changes in the economy that have occurred during the pandemic.

Not all of these businesses are still here today. Some were bought out, others folded because the owner found something better to do. That’s always the case. But the surge in new business creation is still an amazing sight.

Businesses with “High-Propensity of Planned Wages”: one-third of total.

The Census Bureau categorizes businesses with a high likelihood of creating a significant payroll as “High-Propensity of Planned Wages” business applications (HBA), based on the information in the EIN application. About one-third of all EIN applications have been HBAs.

In March, the HBA applications rose to 150,169. The three-month moving average rose to 144,911, up by 7.6% year-over-year and up by 33% from the same period in 2019:

Businesses with “Planned Wages”: 10% of total.

“Business Applications with Planned Wages” (WBA) are a subgroup within the HBAs. They’re businesses that indicated on their EIN applications a date for their first payroll. They have funding to meet that payroll, and they’re ready to hire and pay wages. These businesses are most likely to grow their payroll and become significant employers. Only about 10% of EIN applications fall into this category.

In March, the WBA applications rose to 49,424 (three-month moving average), up by 2.2% year-over-year and up by 24% from the same period in 2019.

But this is far lower than in the years before 2008:

Businesses with a low propensity to become significant job creators: 67% of total.

About two-thirds of the EIN applications are for businesses deemed to have a low propensity to become significant job creators: 291,114 of these businesses were created in March (three-month moving average), according to the EIN applications. This was up by 59% from 2019!

EIN applications by businesses with a low propensity to create jobs were already on fire in the years before the pandemic. But it just exploded during the pandemic (red line in the chart below).

Since January 2020, over 10.7 million of these businesses have been created. Many of them end up employing only their owners – entrepreneurs chasing after their dream without VC funding, flying their operations on a wing and a prayer from day one.

But applications by businesses with planned wages (WBAs) fell off a cliff during the Financial Crisis and then languished for years at those low levels. During the pandemic, applications surged but didn’t return to those pre-Financial Crisis levels (green line).

EIN applications by biggest categories.

Details below the chart:

Applications by retail businesses, mostly ecommerce, (red) blew through the roof during the pandemic when many brick-and-mortar retailers were shut down. People were trying to sell anything from specialty cosmetics to tools. They could use platforms, such as Amazon, and their fulfillment and delivery networks, for a quick way to get something going. But it’s dog-eat-dog on the internet, and results may vary.

In March, the three-month moving average of EIN applications for retail businesses rose to 69,136; while still a huge number, and still up by 66% from the same period in 2019, it was down 10% year-over-year, and down by 34% from the stunning peak in the summer of 2020.

Applications by professional services businesses (light blue) have been surging recently from record to record, to 57,722 in March, up by 17% from a year ago, and by 53% from 2019. This includes law firms, IT businesses, engineering firms, etc.

Construction (black): 42,002; +5.0% yoy, +27% from 2019.

Transportation & warehousing (green), much of it likely related to ecommerce delivery: 34,710; -7.6% yoy; +76% from 2019.

Administration and support (yellow): 30,407; +14% yoy, +66% from 2019.

Healthcare & Social Assistance (maroon): 26,861; +13% yoy, +50% from 2019.

Accommodation and food services (gray): 24,460; +14% yoy, +39% from 2019.

Real Estate (purple line with dots): 24,179; -1% yoy, +4% from 2019.

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