New establishment openings remain elevated in the Ninth District

Every day, new businesses open and others close down, either creating new jobs or taking existing jobs with them. These openings and closures, known as establishment births and deaths, have increased during the pandemic recovery, particularly in the Ninth District.

Establishment births have grown beyond their pre-pandemic trend. And while deaths initially lagged, they are catching up, according to data from the Bureau of Labor Statistics’ Business Employment Dynamics series. But not all states in the region have benefited as greatly from this business boom. And some sectors experienced more growth than others, likely furthering a long-term trend of new establishments employing fewer workers than their predecessors.

A business baby boom

The life cycle of businesses is often good for the health of the economy. New establishments play a major role in driving employment growth, and those early years in business help increase an economy’s total productivity. New establishments include brand new startups and new locations for existing businesses that have at least one paid employee.

In the years leading up to the pandemic, establishment births and deaths had been steadily increasing in the United States (see Figure 1). Births and deaths had been gradually increasing in the Ninth District as well, with new businesses slightly outpacing the number of closures on average.

The pandemic changed this dynamic across the country. New establishments surged relative to prior recessions, and a lagging increase in closures was not enough to deter overall growth. Business applications poured in despite the economic turmoil and public health crisis. Some experts pointed to the pandemic shake-up as a motivating force for new business owners.

“After the pandemic led to large layoffs and some businesses going under, a number of people stepped out on their own to try to fill the void,” explained Dennis Winters, chief economist with the Wisconsin Department of Workforce Development.

Scott Poniewaz is a mentor through SCORE, a nonprofit organization which provides small businesses with mentoring. He saw the impact of the pandemic among his clients in Montana.

“With the pandemic, everybody had a little bit more time to think. People were reprioritizing what their passions and their priorities were.”

In the Ninth District, growth in new establishments was even more pronounced. Births consistently outpaced activity nationwide during the pandemic recovery. While closures have caught up with openings in the region in the first quarter of 2024, new establishments remain elevated compared with 2019 levels.

All Ninth District states experienced an increase in new establishments after 2020, but growth rates varied. In the three years after 2020, Wisconsin and South Dakota saw higher growth than the nation and other district states on average relative to pre-pandemic levels.

Winters noted that with Wisconsin’s diversified economy, and more people working from home, many people realized that “they could do more things from home and diversify their workforce portfolio.”

In more rural states like Montana, an increase in population also was a factor according to Poniewaz with SCORE. “With the population growth, there’s a lot of new opportunities for more businesses to be created,” said Poniewaz. “For example, people who traditionally have worked for someone else might see that there’s now an opportunity in property management for vacation home rentals in places like Big Sky. They are tapping into those growing markets and opportunities.”

Growth varied by industry

Growth also varied across industries. The largest share of establishment births and deaths occurred in professional services and in education and health services across the United States. However, only professional services and information saw an increase in the share of new establishments after 2020 (see Figure 2).

Over the last thirty years, new establishments have shifted away from sectors like construction and retail toward white-collar professions. The pandemic likely added fuel to this existing trend as new technologies emerged and remote opportunities increased.

“Professional services is often one of the main sectors where people come to us from—a lot of accounting or marketing, graphic designers, web developers,” explained Poniewaz. “These fields have more ease of entry, because there's a bit more flexibility when starting out.”

Dennis Winters also saw growth in these sectors in Wisconsin. “Those two industries in particular are very dynamic. It’s pretty easy to start a little company up and offer anything from consulting to AI to website construction. There is not a large amount of capital required, and barriers to entry are low.”

New white-collar businesses often don’t require a large number of workers to get off the ground. This is one reason why the total number of employees per new establishment, or “birthweight,” has decreased over the last few decades as the share of establishments in these sectors have grown (see Figure 3).

That trend accelerated after the start of the pandemic as the labor market turned upside down, which made hiring employees for new establishments much more difficult. Birthweight has increased slightly since 2021, but still remains lower than in 2019. The increase may simply be a return to the long-term trend, bolstered by a recovering labor market and less uncertainty relative to 2020.

Among his clients in Montana, Poniewaz has seen more interest in expanding recently. “A lot of these companies we see are fairly new, so they aren’t necessarily 10- to 20-person companies. However, we are seeing more inquiries from a lot of clients regarding how to find and hire more employees and how to afford the wages to get them.”

Increasing the establishment birthweight going forward may prove difficult, given tight labor markets, according to Winters in Wisconsin. “We have to deal with the underlying challenge of labor or lack thereof. That's limiting some of the long-term growth of these businesses.”