“National Emergency” – US Business Formation Goes Negative 

Applications to start new businesses that would eventually hire employees plunged 16% between 2007 and 1H19. The pace of applications did tick up in 2012 but fell again in 2019 despite President Trump’s constant promotion that his tax cuts, deregulatory actions, record-high stock market, and a trade war against China would allow American companies to prosper. Applications dropped 2.6% in 1H19 YoY.

Business formation has been one of the top drivers in wealth creation for millions of Americans. When fewer companies are created, this means fewer Americans will prosper and could heavily weigh on consumer sentiment.

Smaller to medium-sized firms account for at least 85% of all hiring, making them a gateway for most workers into the workforce.

With an unemployment rate at record low levels, a drop in new business formation could result in fewer firms looking for skilled workers, an environment that will often slow pay growth.

“What you see is reduced social and economic mobility,” said Steve Strongin, head of global investment research at Goldman Sachs. “It means that most of the growth is occurring in the corporate sphere, which keeps wage growth down and improves profits.”

Goldman Sachs published a survey of business owners who participated in its “10,000 Small Businesses” program.

The survey recognized that entrepreneurs are having a hard time obtaining skilled workers and had even more difficulty navigating complex regulations. Both factors have decreased the rate of new company creation.

According to an online survey of 2,285 alumni of the Goldman program, only 20% of business owners said they felt that President Trump’s 2017 debt-fuelled tax cut would increase their companies’ growth.

Other factors include social and demographic crosscurrents that are limiting opportunities for entrepreneurs and smaller companies.

Millennials will take over the workforce in the next four to six years, but their economic mobility is somewhat limited in creating new businesses because they don’t have the money, due to high amounts of student loans and no savings.

There were also several sectors of the economy where business creation was somewhat muted. That was seen with 116,459 fewer construction companies than it did in 2007, a 15% decline in a little more than a decade.

Fifty-four thousand fewer retailers employing less than 20 people were seen in the last decade, and more than 26,000 small manufacturers have closed up shop.

With construction and retail sectors in the dumps, many entrepreneurs went to other industries for economic opportunity. This led to less construction and retail jobs across America; many of these jobs are what support the middle class, explains why homeownership continues to collapse.

Even though the number of tech startups has jumped 20% since 2007, the sector only represents 6 million companies or just about 2% of all companies.

And according to John Dearie, founder of the Center for American Entrepreneurship, the decline in business formation “amounts to nothing less than a national emergency.”