Business Startups FORECASTS & TRENDS E-LETTER
by Gary D. Halbert

June 28, 2016

Business Startups Flock To Just 20 US Counties – Here’s Why

IN THIS ISSUE:

1. Business Failures Continue to Outnumber Startups

2. New Study: Bad News For Small Towns & Rural America

3. Things Are Only Going to Get Worse For Rural America

4. New Business Startups Gravitate to Higher Educated Workers

5. Conclusions – Outlook For Small Town America is Not Good

Overview

Most of you reading this are aware that new business startups have fallen below business closures since 2008. Since records have been kept, new business startups outnumbered business closures each year, often by wide margins. But not so since the Great Recession.

A new study released in late May by the non-partisan Economic Innovation Group (EIG) found that fewer new businesses have been started in the last five years than at any time in the last 30 years. This fact is just more proof that this is the weakest economic recovery in post-war history.

New business startups outnumbered business failures by about 100,000 annually from 2000 to 2008. Yet according to the new EIG study based on the latest Census Bureau data, business failures have outnumbered startups by around 70,000 a year since 2008.

And the news from the latest EIG study gets even worse. The new businesses that did start up during 2010-2014 were concentrated mainly in large metro areas on the East and West Coasts and in Texas, as opposed to in rural America. In fact, half of all new business startups were concentrated in just 20 large counties across the US.

Let that soak in. According to recent US Census Bureau data, 50% of all new businesses that were started in 2010-2014 were domiciled in just 20 large US counties. The question is why? The answer seems to be that most new startups are high-tech ventures that need higher educated workers, and those workers are increasingly living in our largest cities.

This is a very complicated issue with serious implications for the future of our country, especially rural America. I’ll try to explain as we go along today.

Business Failures Continue to Outnumber Startups

As a preface to today’s main topic, let’s revisit the trend in new business startups versus business closings in the US in recent years. As you probably know, new business startups outpaced business closings/failures for decades, that is until the Great Recession of late 2007-early 2009.

An ugly new trend developed in 2008 which has seen business failures outnumber new business startups since then. Let’s take a look at a chart compliments of GALLUP:

Business Startups vs Business Closings

While the US economy has been in a “recovery” since early 2009, it has been the weakest rebound in post-war history, with GDP growth averaging only about 2% since then. This explains in part why annual business failures have continued to outpace new business startups.

This introduction leads us to our main topic today.

New Study: Bad News For Small Towns & Rural America

Americans living in small towns and rural communities are dramatically less likely to start new businesses than they have been in the past. This is an unprecedented trend since records have been kept that jeopardizes the economic future of vast swaths of the country.

The recovery from the Great Recession has seen a nationwide slowdown in the creation of new businesses, or start-ups. What growth has occurred has been largely confined to a handful of large, innovative regions including Silicon Valley in California, New York City, parts of Texas and Florida. Much of the rest of the country has been left behind when it comes to new business formation in recent years. This trend has ominous implications for rural America as I will explain below.

The findings I will discuss below come from a new analysis of Census Bureau data by the Economic Innovation Group, a bipartisan research and advocacy organization focused on innovative solutions to America’s economic challenges.

This recent concentration of business startup activity in only the largest US cities is unusual, economists say. In the early 1990s economic recovery, 125 counties combined to generate half of the total new business establishments in the country. In the current recovery, just 20 counties have generated half the growth in new business startups. That’s amazing!

The data suggest that highly populated areas are not adding startups faster now than they did in the past; they appear simply to be treading water. What is disturbing is the fact that rural areas have seen their new business formation fall off a cliff.

Economists say the divergence reflects a combination of trends, all of which have harmed small businesses in rural America. Those include the rise of “big-box” retailers such as Walmart, the loss of millions of manufacturing and construction jobs across the country and a pullback in business lending that has hit small-town and rural borrowers particularly hard.

The changes also reflect a fundamental shift over the past two decades regarding which industries and workers power the country’s economic growth. That shift advantages highly educated urbanites at the expense of everyone else. Polling suggests it is one of the driving forces in the political unrest among working-class Americans – particularly rural white men (many of whom have flocked to Republican Donald Trump’s presidential campaign this year).

Rural areas have almost completely lost out on new businesses.  Just 20 counties, all of them large metropolitan areas, have accounted for more than half of all new businesses in 2010-2014. Of those 20 counties, five are in California, five are in Texas, four are in Florida, three are in New York and there is one county each in Illinois, Arizona and Nevada.

20 Counties Generated Half of Net New Establishments

Just as worrying, only 73 counties nationwide made up half the net increase in new jobs since 2010. That suggests a growing concentration of new business in the nation’s most urban areas, marking a significant change historically.

[As of 2013, there were 3,007 counties, 64 parishes, 19 organized boroughs, 11 census areas, 41 independent cities, and the District of Columbia in the US – for a total of 3,143 counties and county-equivalents nationwide.]

So, the 73 counties that made up half of the increase in new jobs since 2010 represent less than 3% of all counties and county equivalents in the US. Wow!

Things Are Only Going to Get Worse For Rural America

Most economists and demographers who study these trends believe that things will only get worse for rural America in the years ahead – in terms of new business startups. Manuel Adelino, an economist at Duke University who has published numerous papers on entrepreneurship patterns, concludes that it is mostly about education levels. He says:

“Capital chases high-growth ideas, and high-growth ideas tend to be concentrated in areas of highly educated and highly skilled workforce. This suggests that the lack of new business formation in rural America may lead to widening gaps in income and employment between those areas and big cities.”

Other experts warn that the trends could be self-perpetuating and endanger the very life of rural economies in the years to come. John Lettieri, one of the founders of the Economic Innovation Group, warns:

“It’s going to get much much worse [for rural America]. As bleak as these numbers are now, these may be the good years.”

A Weak Recovery For Small Counties

From 2010 through 2014, US counties with 100,000 or fewer residents combined to lose more businesses than they created – despite a growing national economy and a falling unemployment rate. In the recovery beginning in 1992, by comparison, those same counties created a third of the nation’s new businesses on net.

The smaller counties have seen their job creation rates fall off over the past three economic recoveries as well. In the ’90s recovery, less-populated counties accounted for more than 1 in 4 new jobs in the country. In the recovery beginning in 2002, that had fallen to 1 in 5. In this recovery, it is less than 1 in 10.

Nearly 2 out of 3 rural counties lost businesses, on net, from 2010 to 2014. That is up from just over 2 in 5 counties in the early 2000s and just under 1 in 5 in the ’90s.

The counties losing business establishments span the country and include almost every variety of rural areas, from farming and manufacturing communities in the Midwest to coal-reliant swatches of Appalachia to coastal counties in the Pacific Northwest where the timber and fishing industries have dwindled.

New Business Startups Gravitate to Higher Educated Workers

Through the 2Q of this year, according to a Brookings Institution analysis of Moody’s Analytics data, the United States’ 100 largest metro areas had recovered all of the jobs they lost in the Great Recession and added nearly 6 million new jobs. Yet the rest of the country, combined, was barely 300,000 jobs over its pre-recession peak.

The concentration in large metro areas in part reflects the differences in the brand of entrepreneurship historically practiced in rural areas, compared with the higher-tech start-ups that have risen up in recent decades. Recent research suggests there has been no decline in the formation rate for the Silicon Valley-style startups that economists generally consider to be “high growth,” which means the sort of companies that could grow to employ hundreds or thousands of Americans.

The drop has come in the formation rate for other types of businesses, such as small manufacturers, construction firms and service establishments, such as restaurants. Those small businesses have traditionally served as critical vehicles for middle class job creation and economic mobility in much of America. The small businesses of that world are struggling, while high-tech startups are not, generally speaking.

Not surprisingly then, the 20 counties that combined for half the country’s new business formation are almost entirely pillars of the so-called “innovation economy.” They include the counties surrounding San Francisco, Los Angeles, New York, Miami, Austin, Dallas and Chicago.

Those areas contain higher-income, more highly educated workers, who appear to have had a much easier time accessing capital – the infusion of money you need to start a business – in this recovery than workers in the rest of the country.

Conclusions – Outlook For Small Town America is Not Good

A New study from the non-partisan Economic Innovation Group, based on newly-released Census Bureau data, found that over 50% of new business startups since 2010 were concentrated in America’s 20 largest counties.

These counties include some of America’s largest cities, mainly on the East Coast, West Coast, Texas and Florida. In years past, such business startups might have preferred small town America where wages and real estate might have been lower. But things have changed.

Today, business startups are dominated by high-tech companies that need higher educated employees, even if they have to pay more to get them. For better or worse, higher educated Americans live in the cities, and increasingly in the big cities.

So many new business startups have moved to the 20 largest counties where the most highly educated Americans increasingly reside. This trend is very likely to continue. This new study has broad-reaching implications for rural America, and the implications are not good.

This is a major trend that is getting next to no coverage by the mainstream media. There is obviously a lot more to say on this topic, as I will do in coming weeks, but I will leave it there for today as a starter.

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Happy Independence Day Weekend Everyone!

Let me wish you all a very happy 4th of July weekend and the holiday on Monday. We are so fortunate to live in this great country and enjoy the freedoms we have! Given the current “Brexit” movement, which is not over yet, our appreciation for the United States of America just got even stronger.

Debi and I will be entertaining a dozen or more of our daughter’s closest friends who will descend on our home on beautiful Lake Travis outside of Austin tomorrow night. By request, I’ll be smoking chicken and beef fajitas on Saturday, along with my signature guacamole and all the fixin’s. We’ll definitely give thanks to God for our wonderful country as we bless that meal and others.

I hope your weekend will be as much fun as mine!