Small businesses are a crucial component of the U.S. economy, contributing significantly to job creation and productivity growth. The COVID-19 pandemic in 2020 created a surge in new business formations, attributed to various factors such as increased household wealth, government stimulus checks, and more time spent at home. This resulted in a rise in entrepreneurship-friendly opportunities, with higher savings enabling individuals to invest in new businesses. The pandemic also led to higher lay-off and quit rates, providing people with the opportunity and time to start their own businesses.
Despite the increase in business births during the pandemic, data shows a recent decline in new business formations, with 5.5 million new legal formations in 2022. This number was nearly double that of a decade ago but has started to recede from the peak experienced during the pandemic. States like Florida, Texas, and California, which saw the highest number of business births during the pandemic, have also experienced recent declines in new business formations. Among them, Florida led with 669.6K business births in 2022, followed by Texas and California.
The top states for business formations are known for their business-friendly policies, attracting both new and existing businesses. California, with the largest economy in the U.S., had the largest decline in business births from 2021. Other states with significant numbers of new businesses included Delaware, Georgia, and New York, all of which experienced a decrease compared to the previous year. However, when looking at productivity relative to population, Delaware, Florida, and Georgia were the most productive in terms of new firm formations.
Data from Q2 2023 reveals that the industries with the highest number of businesses overall were professional services, healthcare, construction, manufacturing, and retail trade. In terms of year-over-year growth in business births, states like Idaho, Wyoming, New Mexico, and Colorado experienced positive growth rates. Idaho had the highest growth at 40%, followed by Wyoming, New Mexico, and Colorado. However, most states saw negative growth from 2021 to 2022, with New Hampshire experiencing the most significant decline.
The future of new business formations remains uncertain, but implementing policies that support small businesses will be crucial in helping them thrive and attracting new entrepreneurs to the market. Despite the challenges, the entrepreneurial spirit in the U.S. remains strong, promising continued innovation and job creation in the small business sector. The data presented highlights the dynamic nature of the small business landscape and the need to adapt to changing economic conditions to support growth and prosperity.
