It's been a year of insights since Inc. magazine first launched the Inc. Entrepreneurship Index: from the decline in Millennial entrepreneurship to the role immigrants play in the startup economy to the shift in credit access for small businesses. But none has been so important as the contraction around new entrepreneurs and new hires. 

At 83 out of 100, the overall Inc. Entrepreneurship Index was essentially unchanged in the fourth quarter of 2018 compared to three months prior--marking the Index's first complete turn around the economic sun. Stability is great news, right? Not so fast. A more broad view of the gauges making up the Index over the last six years shows the startup rate as trending downward and small-business jobs decreasing slowly and steadily. While America's big businesses might be riding the stock market to new heights, America's smaller businesses appear to be entering the early stages of a slump.

This should cause the business community to pause. Entrepreneurs are perpetually at the leading edge of the economy--generating half of all private sector jobs, payroll, and output. Today's startup is tomorrow's Apple or Amazon. As the Inc. Entrepreneurship Index shows, these fledgling businesses are simply not growing as much as they used to. Sluggish job growth is the anchor weighing down U.S. entrepreneurship overall. For the fourth quarter of 2018, the Index shows just 50 out of 100 as a score of growth in small-business job creation. That's the lowest it has been since 2010.

Small Businesses Job Growth, By Year

This is partly a function of high employment levels; fewer unemployed workers means fewer opportunities for growing your staff. However, there are other red flags.

Data from the National Federation of Independent Business's (NFIB's) quarterly Small Business Economic Trends report shows that, while small-business optimism is still very high, it is declining. In January 2018, a net 41 percent of business owners expected business conditions to keep improving. Exactly one year later, that number plummeted to only 6 percent. Moreover, for four straight months, the share of small-business owners expecting growth in sales declined to 16 percent in January--and remained the same in February. That's down from 29 percent in September 2018, as the NFIB data shows. According to the January 2019 Economic Sentiment Survey from freelance job site Thumbtack, uncertain economic conditions were among the top five worries for small-business owners. The last time business owners feared uncertain economic conditions with as much vigor was in 2017.

Does the slowdown in entrepreneurship suggest that a larger economic recession is on the way? Or might we be due for a sharp rebound in 2019?

If you consider the direction of the Inc. Entrepreneurship Index alongside macroeconomic data, it's easy to make a bearish case. In Q3 and Q4, there have been two consecutive quarters of slowing GDP growth, and the recent government numbers from March 28 show the GDP growing by 2.2 percent in Q4 of 2018; this is below the initial estimate of 2.6 percent.

Despite the downward trends, there is good news. At 6.4 percent, the rate of entrepreneurship in the United States, as calculated in the Inc. Entrepreneurship Index, was at its highest level in the fourth quarter of 2018. This means 15.8 million people were working as entrepreneurs, with or without employees. 

And if you believe more money in people's pockets will benefit business, the tighter job market pushing up wages is also good news. As showcased in the Inc. Entrepreneurship Index, average weekly earnings have been on a steady incline since the recession. 

Wage Growth, Year over Year

Average Weekly Earnings

Another positive sign: While entrepreneurship across the U.S. is slowing--as measured by a cumulation of factors, including growth and access to capital--the total number of entrepreneurs peaked for 2018 in Q4. Also, while the U.S. as a whole is slowing, some regions are growing quickly. This is born out in Inc.'s Surge Cities list--an index, developed with Startup Genome, of the 50 best places in America for starting a business. It found that in places like Austin; Raleigh, North Carolina; Nashville; Salt Lake City; and San Francisco, entrepreneurship is, well, surging.

To be clear, the latest Inc. Entrepreneurship Index does not present signs of a looming recession. But the signals it is sending shouldn't be dismissed. New and small businesses--and the jobs they create--are at the fore of economic activity. As such, they should be front and center. 

Published on: Apr 19, 2019