New Measuring Stick for the Small Business Economy: Comparing New Employer Firm Applications to Actual Starts

by Research Economist, Brian Headd

In 2018, the U.S. Census Bureau began producing a timely small business economic indicator: new business applications and projected future actual starts. Small and new businesses are more susceptible to macroeconomic forces than their larger and older brethren. Their existence or lack thereof can be an initial sign of economy-wide issues.

The Census Bureau’s Business Formation Statistics (BFS) released data back to mid-2004 on the firms filling out business applications to hire their first employee(s). This data fills a current information gap. Today, weekly, and monthly is available only a few weeks after the reference period (www.census.gov/econ/bfs).

BFS has a few applications for new businesses, but this blog focuses on High Propensity Business Applications (HP BA). HP BAs include corporate applications, business applications with planned hiring dates, and applications from select industries with a high likelihood of hiring (www.census.gov/econ/bfs/technicaldocumentation/methodology.html).    

The release of BFS application data creates two primary questions:

1. How does the number of business applications equate to the number of actual new employer firms?
2. Does the number of business applications becoming actual new employer firms change over time or throughout the business cycle?

Clarity for these questions became more necessary with the relatively large bounce in business applications during the COVID-19 pandemic.

I use the ratio of business applications to new employer firms as an indicator of the likelihood that businesses that apply to hire their first employee actually follow through. Annual data back to 2005 is used to show how the likelihood has changed over time. I also estimated HP BA 2023 from the first nine months of the year. Note that sole proprietors and certain other new employers don’t necessarily need to fill out a business application to hire their first employee(s), but many do.

In addition to BFS, the Census Bureau’s annual Business Dynamics Statistics (BDS) program tracks firms with employees by firm age and has data dating back to 1978 (www.census.gov/programs-surveys/bds.html). There are some timing differences for BDS and BFS. BDS uses employment in mid-March as an indicator of “new” employers to create annual data, so the data includes the last three quarters from the previous year and the first quarter of the current year. BFS monthly numbers were added to create annual data. Imperfect comparisons notwithstanding, these data sources should give a rough estimate of how to interpret current business application figures. With this timeline, it can take a year or so for an HP BAs to show up in the data as a new employer.

Putting that timeline aside for the sake of analysis, the table below shows that, from 2005 to 2021, the aggregate share of HP BAs roughly forecasts that 34.5 percent became new employers. However, not all new employers fill out business applications and many of them close at some point after forming. On an annual basis, this share tended to hold with minimal fluctuations. Overall, saying that the level of HP BAs will result in a level of just over one-third of new employers is reasonable based on the calculations.

More recently, HP BA rose quite a bit from 2019 to 2022. BDS also shows an increase in new employer firms from 2019 to 2021, but the ratio of HP BA to new employers declined to 0.27 in 2021. More data will allow us to see if the decline in the last few years is because of the time lag in businesses hiring their first employee or whether fewer applications actually complete their first hire.[1] In contrast, the Bureau of Labor Statistics’ Business Employment Dynamics (BED) number of employers rose quite a bit from 2021 to 2023, indicating employer births were up in 2022. Further, the lag from application to hiring is more than a few months and is more likely to occur in about eighteen months. Note that both BED and BDS total firm levels here are essentially March to March. Based on the HP BA from 2021 and the BED figures from 2022 and 2023, it seems reasonable to expect the BDS total employer firm figure to rise by about 150,000 from 2021 to 2022.

While about two-thirds of high-propensity business applications may not hire employees, a fair amount of these may start or continue as non-employer businesses (having owners without having employees) which are significant contributors to the economy as well.  While the share of high-propensity business applications that turn into actual employers may appear to be low, it does not diminish high-propensity business applications’ value as an important economic indicator for business starts that can help inform policy.

For small business economists/policymakers, the biggest value comes from small businesses having a viable economic indicator that directly impacts them in a timely manner. Thank you, Census!

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[1] Note that a slight methodology change could also be at play, see CES Working Paper, Business Formation: A Tale of Two Recessions, by Emin Dinlersoz, Timothy Dunne, John Haltiwanger and Veronika Penciakova (www2.census.gov/ces/wp/2021/CES-WP-21-01.pdf).

High Propensity Business Applications vs. New Employer Firms and All Employer Firms