March 16, 2022
The pace of new business creation in California can be a useful gauge of the health of the state’s economy. Past research suggests that new businesses account for a sizable share of job creation and also are more sensitive to swings in economic conditions than older businesses. Our own analysis of business formation data in California suggests that it typically has been a leading indicator of changes in unemployment.
This graph shows weekly U.S. Census data for the formation of employer businesses since 2016. This graph only considers those businesses that report having planned wages, as opposed to businesses created by self-employed individuals or shell companies. It also smooths the weekly data by using the moving average over a four week period. The standard pattern within a year is for a surge of new business formation at the beginning, then gradual declines as the year goes on. In 2020, new business creation was significantly disrupted by the COVID-19 pandemic. The graph shows business formation reverting to the typical pattern beginning in 2021.
The next graph shows the four-week average number of business formations in 2020, 2021, and 2022 to date relative to the 2015-19 average for the same weeks. This shows that significantly more new employer businesses were created in 2021 than the recent average. The pace of business formation over the summer was slower in 2021 than in 2020, as the reopening of the economy in the summer of 2020 saw a flurry of business creation in response to the disruption caused by the pandemic. The first 2 months of 2022 show the pace of new business creation returning to the 2015-19 average.