Who Will Pick Up The Economic Slack?
Just a few days ago, the Commerce Department released figures on new business formation, and they are strikingly upbeat. They say a lot about how this pandemic has played out economically and suggest that a powerful recovery lies ahead but one filled with tremendous business and labor turnover.
The statistical release indicates that in last year’s fourth quarter some 1,115,984 new businesses of all sizes formed in the United States. Of these, some 373,740 are likely to hire new employees, what the department refers to as “high-propensity” startups. These fourth quarter figures were down sharply from the third quarter, 28.5% for total new businesses and 30.5% for the high-propensity sort. This all seems reasonable. The summer quarter enjoyed a partial economic re-opening, while the last quarter saw renewed lockdowns and quarantines. What is impressive is that even the reduced fourth quarter activity was some 30% above 2020’s first quarter, which was largely free of the pandemic’s economic effects. Still more telling, those fourth quarter figures were about the same amount above levels of business formation in 2018 and 2019. If this were not compelling enough evidence that business generally is gearing up to come back from the pandemic strictures, preliminary figures for January show that new business formation in that month alone amounted to 492,133, up 42.6% from December, and high-propensity business formation came to 164,691, up 41.2% from December.
This pattern should engender optimism about the economy as it emerges the constraints on business activity the authorities have imposed in response to the pandemic. The higher-than-average level of business formation says clearly that business is eager to fill the gap left by the unavoidable bankruptcies and closures created by the economic strictures. Because of the vagaries of bankruptcy law, many of those forming news businesses are likely the same people whose businesses failed during the lockdowns and quarantines. They are leaving their creditors holding the bag, so to speak, while they start up fresh with new capital. Others behind these new startups are new entrepreneurs ready to step in to take over where others have failed. Either way, the message is clear. Plenty are willing, indeed eager to fill the economy’s needs when it re-opens.
This unfolding pattern finds confirmation in the mix of employment numbers. On the surface, labor statistics appear to contradict each other. On the one hand, initial claims for unemployment insurance remain elevated, not as high as in April, to be sure, but much higher than historical averages. This news says that large numbers of people were losing their jobs. On the other hand, the Labor Department reported strong net employment growth between June and November, enough to recover more than half the jobs lost during the severe lockdowns of April and May. The business turnover just described makes sense of this seemingly contrary behavior. As old firms have gone out of business or downsized, they have laid off people who have naturally gone on to claim unemployment insurance. As new firms have formed, they have hired people, sometimes the same people who were laid off, especially if they are in part the same people who managed the failed concern. Though these workers then drop off the unemployment rolls, their original claim remains in the statistics. This kind of churning in business formation as well as hiring and firing keeps both net job creation and indicators of layoffs simultaneously higher than in more normal times.
The economy will no doubt suffer many imbalances as a legacy of this pandemic and the steps the authorities have taken to contain it. Many creditors, for instance, will face defaults even as they lend to other, newer firms coming on stream to take the place of those that failed. The pressures may ultimately cause many creditors to default themselves. Once the re-opening surge runs its course, some of these legacy debt problems may well impose financial imbalances on the economy that will cause trouble, perhaps even a recession. But for the time being, these reports indicate that the failed businesses are seeing rapid replacements so that the nation’s Main Streets as well as the avenues of its great cities may quickly free themselves from the empty store fronts and boarded up windows that have multiplied while the quarantines and lockdowns have remained in place.