If you're feeling better about the economy these days, you're not alone. A new study shows the growth rate of new small businesses is ticking up--though as a whole, times aren't as flush as they were before the latest recession.
New businesses opened in larger numbers across America over the past year. That should be good news for the economy, and mostly it is, according to Kauffman Foundation's Index of Startup Activity for 2015, released on Thursday. But new business formations generally keep track with economic cycles, the survey’s researchers say. And so it’s hard to know if the small business recovery, like the one of the larger economy, has legs.
What’s more, the increased small business growth rate for the year occurs against a backdrop of overall declining entrepreneurship, with the total number of new businesses steadily dropping for the past 40 years.
“Unfortunately, the larger [small] businesses still don’t look like they are recovering to pre-recession levels,” says E.J. Reedy, director of policy and research at the Kauffman Foundation. “So from a growth perspective, the challenge is around how we continue to have not just new entrepreneurs, but entrepreneurs that can grow, and there are some troubling signs in that regard about the health of the U.S. economy.”
Behind the Numbers
The index, which measures the rate of new business formation per 100,000 adults, is divided into three segments--the total rate of new business formation (including solo entrepreneurs), the share of new businesses started to take advantage of new opportunities, and the number of new businesses with at least one employee, as a share of the population.
Kauffman makes the distinction between entrepreneurs who start businesses to take advantage of new business opportunities, as opposed to those who start businesses because they lost a job, because it is likely to be an indication of a more durable business.
While the overall index is still in negative territory, the index growth rate for new businesses rose to 0.31 percent in 2014, compared to 0.28 percent in 2013. That rate, which translates into roughly 569,000 new businesses for the year, is also fractionally higher than the rates for the 10 years leading up to the 2008 recession.
And contrary to the popular perception that it’s the young starting the most businesses, more than 52 percent of new businesses in 2014 were formed by entrepreneurs between the ages of 45 and 64. Less than a quarter of new businesses were started by entrepreneurs between 20 and 34 years old.
“It is a myth that a lot of younger people are starting businesses,” says Rob Fairlie, a professor of economics at the University of California, Santa Cruz and a lead researcher for the study. “It’s true that they are more likely to take risks, but the two big factors that limit young people from starting a business is that they don’t have the capital, and the skills.”
The share of new opportunity entrepreneurs also increased slightly for 2014, to 79.6 percent of the sample, up 1.4 percentage points compared to 2013, and about equivalent to the rate in 2007, prior to the recession
The number of businesses with at least one employee--a key indicator for unemployment numbers, as most workers are employed by small businesses--is growing at a much slower rate. Kauffman gauges such businesses on a numerical scale, rather than as a percentage. And for 2014, that number was 130.6 businesses for every 100,000 people, an increase of 2.2 points compared to 2013, but far below the score of 188.3 as the recession was peaking in 2009. The score for 2014 works out to about 314,000 new businesses for the year.
The index also had some important findings about various minorities critical to the entrepreneurship economy.
Immigrant entrepreneurs, for example, continue to be some of the most avid business creators in the U.S., and are nearly twice as likely to start a new business as native-born entrepreneurs. The growth rate of such business increased at a rate of 0.52 percent, compared to 0.27 percent for non-immigrant entrepreneurs for 2014.
And for anyone paying attention to the gender issues that Silicon Valley and the tech world in general are struggling with, the growth of women-owned businesses has been flat for years, as the rate of male-owned businesses continues to grow.
Women-owned businesses grew at a rate of 0.22 percent for 2014, compared to men, who started businesses at a rate of 0.41 percent.
“Among women, the rates are fairly consistent, so you don’t see a huge uptick and huge swings down,” Reedy says. “Male entrepreneurship for the last decade has seen a huge increase, particularly during the recession, and driven out of necessity.”