The expansion of new businesses is one of the biggest and most surprising sticky changes to come out of the pandemic economy

And yet, the plague money is long gone.

By Wolf Richter for WOLF STREET.

New business forms in March were up 4.5% from February, up 10% from year-ago levels, and up 50% from March 2019, based on filings with the IRS for a federal Employer Identification Number (EIN), according to the Census Bureau today.

The three-month average activity, which strips out some of the ups and downs from month to month, was up 3.7 percent from a year ago and up 50 percent from the same period in 2019.

Here’s the surprise. Still going on! During the pandemic, the extra money distributed by the government served as start-up capital, and new businesses sprang up as many people lost their jobs. But now that’s all over, and business volumes are still 50% higher than they were before the pandemic and growing again.

Note: You do not need an EIN to become self-employed or start a business without employees. Your social security number is enough. You didn’t need an EIN to get a PPP loan. A social security number was enough. A business needs an EIN if it pays regular employees, is a corporation or partnership, and for other purposes (trusts, estates, etc.).

EIN applications for trusts, estates, tax liabilities, etc. are excluded from this data. This data only covers EIN applications for typical businesses.

The biggest wave since 2020.

A whopping 16.1 million businesses were launched between January 2020 and March 2023 – a testament to the massive changes in the economy caused by the pandemic.

Not all of these businesses are still here today. Some were purchased, others folded because the owner found something better. It’s always like that. But the proliferation of new businesses is still an impressive sight.

Businesses with a “high propensity for projected wages”: one-third of the total.

The Census Bureau classifies businesses that are likely to generate higher wages based on the information in the EIN application as “High Propensity to Projected Wage” Business Applications (HBA). About one-third of all EIN applications are HBAs.

In March, HBA applications rose to 150,169. The three-month moving average rose to 144,911, up 7.6% year-over-year and up 33% from the same period in 2019.

Businesses with “projected salary”: 10% of total.

“Business Applications with Planned Wages” (WBA) are a subgroup within HBAs. These are businesses that have indicated the first payroll date on their EIN applications. They have the money to meet that payroll, and are willing to hire and pay wages. These businesses will increase their payroll and become significant employers. Only 10% of EIN applications are in this category.

In March, WBA applications rose to 49,424 (three-month moving average), up 2.2% year-on-year and up 24% from the same period in 2019.

This is much lower than before 2008.

Businesses with a significant entrepreneurial tendency: 67% of the total.

About 2/3 of EIN applications were for businesses deemed to have a low entrepreneurial propensity: 291,114 of these businesses were created in March (a three-month moving average), according to EIN Applications. This is a 59% increase from 2019!

EIN applications from businesses with a low propensity to create jobs came under fire in the years leading up to the pandemic. But it exploded just as the outbreak did (red line in the chart below).

As of January 2020, more than 10.7 million of these businesses have been created. Many of them end up being just owners – entrepreneurs chasing their dreams without VC funding, flying their operations on a wing and a prayer from day one.

But business applications for WBAs fell off a cliff during the financial crisis and then languished at those low levels for years. During the pandemic, applications increased but did not return to those pre-financial crisis levels (green line).

EIN applications in major categories.

Details below the chart:

Applications in retail businesses, mostly e-commerce; (Red) The roof was blown when many brick-and-mortar retailers closed during the outbreak. People were trying to sell anything from special cosmetics to tools. A quick way to find something is to use platforms like Amazon and their fulfillment and delivery networks. But on the internet it’s dog eat dog, and results may vary.

In March, the three-month moving average of EIN applications for retail business rose to 69,136. While still a big number and up 66% from the same period in 2019, it’s down 10% year-over-year, and down 34% from its impressive peak in the summer of 2020.

Applications in professional services businesses (Light Blue) has been on a recent run from record to record, up 57,722 in March, up 17 percent from a year ago, and up 53 percent from 2019. This includes law firms, IT businesses, engineering firms, etc.

Construction (Black): 42,002; +5.0% YoY, +27% from 2019.

Transportation and storage (green), most likely related to ecommerce offerings: 34,710; -7.6% YoY; + 76% from 2019.

Management and support (yellow): 30,407; +14% YoY, +66% from 2019.

Health care and social assistance (Maroon): 26,861; +13% YoY, +50% from 2019.

Accommodation and food services (grey): 24,460; +14% YoY, +39% from 2019.

real estate (purple line with dots): 24,179; -1% YoY, +4% from 2019.

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