The Joseph Group

Some Good News – New Business Formations

October 1, 2020

To Inform:

One of my favorite questions I sometimes receive from clients is “what is something happening out there that no one is talking about?” With most eyes focused on the election and the negative economic impact of COVID-19, I think something which is flying under the radar are the individuals out there taking risks and starting new businesses in the current environment.

Going through research reports this week, the chart below captured my attention. The applications for starting a new business surged in the 3rd quarter to reach their highest quarterly level on record. Granted, there was a decline in March and April as COVID-19 hit, so some of the surge may have been a backlog from the lockdown, but the surge in new business applications suggests a much more positive outlook for new business formation than what we saw after the 2008/2009 recession.

Digging into the data, the pickup in new business applications is broad-based across industries. We believe this is important because new businesses play an important role in job creation. According to Goldman Sachs, “new and younger firms historically account for the lion’s share of net job growth.” The recent surge in business applications implies the labor market is likely to recover much faster than it has in past recessions.

Source: Goldman Sachs Global Investment Research

 

Anytime we see a chart like the one above (especially for a hot stock), it’s always prudent to ask if the chart is too good to be true. If there is one caveat, there is anecdotal evidence of people starting small, one person businesses during the pandemic. To this point, we would say two things: First, data for businesses which are likely to hire additional employees has remained at consistent levels – we are not seeing an increase in one area being offset by a decline in another. Second, we believe one of the outcomes of the pandemic is a surge in innovation. Creativity and working from home have already shifted many of our patterns (think ecommerce) and has provided the opportunity for new types of businesses.

When we think about what all of this means for the future, we are reminded of something we wrote to clients back in March – “we cannot ignore the reality of the present situation nor can we ignore the reality of human desire to move through it and make things better.” Life is going to be different after COVID-19 and some things may never go back to the way things were. However, change does not necessarily have to be a negative thing. The new businesses being formed today may be creating tomorrow’s future opportunities.