A NEW ERA FOR ENTREPRENEURSHIP By Curt Long, NAFCU Chief Economist and Vice President of Research THE BOTTOM LINE Forecasting the economy is always a challenge. Few are able to correctly predict the timing of recessions with any accuracy, and those who do are often guilty of predicting numerous recessions that never materialize. At the outset of 2023, 70% of economists anticipated a recession during the calendar year,1 and many prominent forecasters—including the members of the Federal Reserve’s Federal Open Market Committee (FOMC)—likewise predicted a significant rise in unemployment in 2023.2 The combination of the highest inflation in 40 years, the fastest monetary tightening cycle in that time, and a crash in the housing market appear to be all the ingredients needed for a recession (you can find more on my take in the Economic Outlook feature article on page 17 in this magazine). While the economy still faces significant headwinds and a recession is never out of the question, it is incumbent on forecasters everywhere to ask why the economy has remained as resilient as it has for as long as it has, and why the labor market remains so tight. One emerging possibility that could help explain the buoyant economy and a persistently hot labor market is a burst in entrepreneurship. The accompanying chart shows a complete break in the measured level of new business applications. Following a brief dip at the onset of the pandemic, applications saw explosive growth and have since settled at an elevated level. The most notable aspect of the fiscal response to COVID-19 directly related to small businesses, the Paycheck Protection Program, only benefited firms that existed pre-pandemic. In theory, this should discourage startup activity. However, stimulus payments may also have provided entrepreneurs, particularly sole proprietors, with a source of seed capital. More importantly, recent structural changes in the economy, like the rise of remote work and an increase in online retail, create fertile ground for startups. One implication in the rise of new business applications is a more dynamic economy. Not surprisingly, research finds a tight correlation between business applications and new business establishments. More interestingly, higher applications are also associated with greater business deaths.3 This is creative destruction in action, with more nimble Monthly New Business Applications 600,000 500,000 400,000 300,000 200,000 100,000 0 2005 2010 2015 2020 Source: U.S. Census Bureau Business Formation Statistics 10 THE NAFCU JOURNAL July–August 2023
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