Young establishments take recession on the sidelines

Though data on young firms and establishments are not particularly timely, available information suggests that the recession might be convincing entrepreneurs and others to wait a bit before taking the plunge into opening a new storefront or other establishment, and it’s having a residual effect on new jobs.

Data from Business Dynamics Statistics (of the U.S. Census Bureau) show that 2006 was the height of new establishment formation (those under one year of age) in five Ninth District states. Employment was similarly at its height among those establishments at that time—maybe not surprising, given that many such businesses employ only the owner. But some young firms grow very quickly, or are larger to begin with, which is why there is some variation in the two trends.

Since 2006, both measures have steadily slid (see chart). These data partly reflect the decision-making of boot-strapping entrepreneurs who finally decide to hang out a shingle (or not, in this case). But the measures also involve (to an unknown degree) corporate decisions about expansion, as new establishment numbers reflect a business at a unique location, even if it happens to be the second Starbucks in town.

The downward trend is more pronounced in Minnesota, Wisconsin and Montana, where both the number of establishments and related employment dropped in the range of 30 to 40 percent from 2006 to 2009, while the Dakotas saw declines of between 12 and 22 percent. In every state, 2009 levels were lower than, or very close to, those last seen in the early 1980s recession. Other, more-recent data from the Bureau of Labor Statistics suggest that 2010 might be a stabilizing year for new establishments.

Much more on establishment trends and entrepreneurship will follow in the July issue of the fedgazette.