Economic Perspectives - 05/29/26

After the COVID pandemic crisis shutdown, high-propensity applications to form a new business surged. This was most likely due to the stimulus money provided as well as low financing costs, The good news is that, over the past two years, high-propensity business applications have remained at higher levels than what existed prior to the pandemic crisis, and the trend is rising. Although we do not have current data on the conversion ratio for a high-propensity application to become a business, the message remains that, despite the current challenging times for small businesses, the entrepreneurial spirit is alive and well. 

Before discussing the data, definition of the data is warranted. The Census Bureau tracks business applications to form a new business. It provides the following definitions.

• A business application is an application for an Employer Identification Number (EIN) made predominantly for business purposes.

• A business formation is defined as the formation of an employer (wage-paying) business from a business application.

• A high-propensity business application is an application with a high-propensity turning into a business with a payroll. The identification of high-propensity applications is based on the characteristics of applications revealed on the IRS Form SS-4 that are associated with a high rate of business formation.

Let us start by examining monthly high-propensity business applications from July 2004. We can see that applications trending higher between July 2004 and December 2006. A steady decline occurred during the 2007-2009 recession and then began an uneven but steadily rising upward trend until the end of 2019. The pandemic crisis and subsequent fiscal and monetary stimulus created a distortion as application initially plummeted, then soared, only to gradually settle back.



You can see high distortion that resulted from post-pandemic fiscal and monetary stimulus on the chart above. What may get lost is the results once the fiscal and monetary stimulus were removed. The chart below is the same as the first chart except it excludes the data during the stimulus surge and subsequent unwind. The point of the graph is to highlight how high-propensity business applications have remained significantly higher than levels that existed before the pandemic crisis hit. The average monthly high-propensity business application before the pandemic crisis was 106,697. The average for the past two years is now 142,137.



If we carve out the last two years from the above graph, we can see that not only are the absolute levels above the pre-pandemic levels, but the trend rising overall. The message that may get lost in the news headlines is that the entrepreneurial spirit is alive and well. This appears to fit the adage that out of chaos and uncertainty comes opportunities. The high-propensity business applications seem to be signaling that people are seeing opportunities and forming new businesses to take advantage of the opportunities. Headlines regularly highlight how technology and AI are eliminating jobs. What they are not highlighting is that new businesses and jobs are being formed. This may help explain how the headlines are regularly reporting announced layoffs but the initial claims for unemployment benefits are not rising. Perhaps people who have been laid off took the event as the motivation to form a new business and thus did not file for unemployment benefits since they were not actively looking for a new job.

The natural question that may come up is “what percentage of those high-propensity business applications actually converted to a business?” The Small Business Association (SBA) tracks this data with two caveats:

• The most recent data ends as of 12/31/21.

• The Census Bureau's definition of a business is an employer based (wage paying) business, so, there may well be single-person small businesses that are not captured in the formation data.

The graph below shows the conversion rate for a high-propensity business application to become a business. The average conversion rate was 34.7% from 2005 through 2019. Then we see a decline when the pandemic crisis hit in 2020. A possible explanation for this is that it was due to the surge in high-propensity business applications that was illustrated in the first graph. A lot of that surge may have been people who, because of the fiscal and monetary stimulus provided, decided that now was the time to try and start their own business and control their own destiny. As a result, they may have (figuratively) dipped their toes into the new business waters and applied to form a business. Then economic reality may have set in as they learned what it really took to form and run a business. Since the economy was re-opening and existing businesses were offering high salaries to attract employees back into the workforce, the idea of running their own business may have lost its appeal and they went back to working for someone else. Even with the drop in the conversion ratio, there were still over 25% (27.1%) of the applications that resulted in a wage-paying business. We do not yet know if the conversion rate has returned closer to the level that existed before the pandemic. We do know that applications are at a higher level so a conversion rate below 35% may still create more businesses than what was occurring at the end of 2019. An illustration of this is as follows:

• There were 116,456 high-propensity applications as of 12/31/19. The conversion rate was 35.3% which means 41,077 new businesses were formed.

• There were 146,782 high-propensity business applications as of 4/30/26. To create 41,077 jobs (like 2019) would mean a conversion rate of 28%. Anything above 28% would mean more jobs were created than the 2019 level even if the conversion ratio is below the 35.3% level of 2019.