During March, the new business creation in the country skyrocketed with an accumulated growth of 3.4% compared to February. The curious thing here is that during the first quarter of 2021 the creation of new ventures was 62% above the same period of 2020.
In total, the Internal Revenue Service (IRS) received 440,165 applications during March for an “employer identification number.” This is the second spike the U.S. has experienced since July 2020, when new business applications nearly doubled, a peak seen again in January.
“The historic over-night explosion of layoffs last spring, the tsunami of free money from the government for people and businesses alike, whether they needed it or not, whether they were fraudulent or not, and people’s reactions to that free money have upended all kinds of economic dynamics. And the double-spike in applications to start new businesses is one of them,” says Wolf Ritchier, financial analyst and CEO of Wolf Street Corp.
With three different stimulus plans that have injected liquidity into the market, giving aid to companies and cash checks to Americans, economic activity has been boosted, along with savings, and consequently new investments, many of whose money has gone to the financial markets, others to the purchase of housing, another as much to the purchase of cryptocurrencies and apparently to new business creation.
New business creation boomed, but new jobs did not follow the trend
In March there were 153,186 High-Propensity Business Application (HBA), i.e., new business entities that are hiring employees, buying an existing business, changing their business activity or planning to promptly make the first payroll payment to their employees.
Of the HBAs, 53,213 plan to make a payroll payment or pay new staff. This is a 50% increase over 2020. Unfortunately most of the new applications are coming from businesses with low hiring prospects. Many of these are family owned or even just provide employment for the owner. Less than 12% of new business applications plan to hire extensively.
One of the facts that has possibly contributed to the lower hiring by new companies is the destruction of traditional retail businesses known as brick and mortar.
The lockdowns caused a massive bankruptcy of traditional retail, which means that many of the stores will not reopen soon. However, the new conditions have caused a proliferation of online retail, so many businesses and entrepreneurs refocused their attention on this new type of market.
In July 2020, the IRS received over 120,000 applications for new retail business formation, while in March 2021 it was 81,469; approximately double the number of applications for that same month in 2019.
Unfortunately for the unemployed population, online retail demands far less staff than traditional retail, and in many cases these new businesses only employ the owners themselves, so this retail resurgence will not necessarily be accompanied by a resurgence in hiring.
Although the U.S. has been recovering some of the jobs lost, more than 9 million Americans remain unemployed and there is concern that many of these jobs will take longer to recover due to the structural failure of thousands of businesses such as physical retail.