New business formation bounces back; posts first increase since the recession


New business formation rates edged higher for the first time in five years in 2011, according to a new economic report released Wednesday. (Kauffman Foundation / BDS data)

The economy’s nursery is starting to fill up again.

After several consecutive years of decline, the country’s rate of new business births has started rising again, as has the number of jobs those start-ups are creating, according to an analysis of new Census data released on Wednesday.

The Kauffman Foundation, an entrepreneurship advocacy and research group, crunched the latest government figures and found that, in 2011, for which the latest Census numbers are available, new business starts jumped 5 percent over 2010, the largest year-over-year increase in more than a decade.

The rate had fallen every year since 2006, amounting to a 30 percent freefall over that period.

In addition, job creation by those new firms jumped 4.3 percent after dropping 31.7 percent in the previous four years, according to the report. Among the smallest of new businesses, ones with between one and four workers, the employment jump was even higher, at 5.9 percent over 2010.

Dane Stangler, Kauffman’s director of research and policy, acknowledged that “it would be ideal to have more recent data” but said the report should serve as a sign to policymakers that entrepreneurship is starting to rebound.

“This is a significant finding because it reinforces how important these young, small firms are to the economy,” Stangler said in a statement, echoing findings in the report that show about seven out of eight new businesses start small, with fewer than five employees, and that those firms create about a million new jobs each year.

Researchers noted the improvement could have been even more substantial had it not been for the woefully slow recovery in the housing market. In their analysis, they found that metropolitan areas hit hardest by the housing collapse have been markedly slower to recover in terms of new business starts, too.

Nevertheless, the modest increases are a welcome sign for a sector that a growing number of economists credit with the vast majority of the nation’s job growth, and by extension, for an economy that showed yet another sign of sluggish growth on Wednesday.

A number of studies in recent years have shown that start-ups are in fact responsible for virtually all of the nation’s net new jobs (total gains minus total losses) every year.

The 2011 rebound was not limited to any one geographic area, but ratherit appeared to be uniformly spread across the country, researchers said.

Between 2009 and 2010, for example, new business formation rates increased in fewer than 10 percent of states. One year later, rates rose in nearly 90 percent of states.

“Seeing new firms and the accompanying job growth spread across the country paints a heartening economic picture of the U.S.,” wrote Ian Hathaway, one of the report’s co-authors and an economic advisor at Engine, an advocacy group for entrepreneurs.

Follow On Small Business and J.D. Harrison .

J.D. Harrison covers startups, small business and entrepreneurship, with a focus on public policy, and he manages the Post's On Small Business blog.
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