A New Era for Entrepreneurship

Curt Long, NAFCU Chief Economist and Vice President of Research

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 challenger firms replacing less productive incumbents. A similar pattern plays out in the labor market. A one standard deviation rise in business applications is associated with “substantial and significant increases in hires and separations rates over the next 16 quarters.”4

Another recent study looks at the relationship between business startups and overall economic activity.5 Compared with other leading economic indicators, applications for businesses that are likely employers “are particularly useful as indicators of aggregate economic activity.” The authors note that the economic activity that follows could be a direct consequence of startup activity, or it could be that entrepreneurs are able to anticipate future economic conditions and change their behavior accordingly. If the latter interpretation is correct, another implication is that financial press would be far better served asking new business owners about the outlook for the economy, rather than economists.


  1. Golle, Vince, and Kyungjin Yoo. “Economists Place 70% Chance for US Recession in 2023.” Bloomberg, 20 Dec. 2022, https://www.bloomberg.com/news/articles/2022-12-20/economists-place-70-chance-for-us-recession-in-2023.
  2. See FOMC Summary of Economic Projections, 14 Dec. 2022, https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20221214.pdf.
  3. Haltiwanger, John C., Entrepreneurship During the Covid-19 Pandemic: Evidence from the Business Formation Statistics (June 2021). NBER Working Paper No. w28912, Available at SSRN: https://ssrn.com/abstract=3866345.
  4. Ibid.
  5. Asturia, Jose, et al., Business Applications as Economic Indicators (May 2021). U.S. Census Bureau Center for Economic Studies Working Paper No. CES 21-09, Available at: https://www.census.gov/library/working-papers/2021/adrm/CES-WP-21-09.html.