Business Applications Surge Following the COVID-19 Recession

Startups and young businesses are key drivers of job creation, innovation, and productivity growth. However, in the decades leading up to the COVID-19 pandemic, the U.S. economy had become decidedly less dynamic, with declining entrepreneurial activity. After years of sluggish business dynamism, the COVID-19 recovery featured a surprising surge in applications for new businesses.

Business Applications in North Carolina

Similar to national trends, the uptick in business applications^[1] in North Carolina progressed in roughly two waves.

The first wave—from March to December 2020—was characterized by a sharp drop in business applications during the early stages of the pandemic, followed by a sudden surge. Business applications hit an all-time high in July 2020 before declining throughout the rest of the year.

The second wave—from January 2021 onwards—saw business applications surge once again, returning to and remaining at historically elevated levels. Business applications averaged 14,200 per month in 2023, easily surpassing the pre-pandemic average of 8,700 in 2019. In total, there were 171,000 applications to start new businesses in 2023 compared to 104,000 applications in 2019 [Figure 1].

Figure 1

Not all businesses are job creators; many are non-employer businesses such as sole proprietorships. But over the past few years, we’ve seen a rise in applications among businesses that indicate they plan to hire workers. Applications with planned wages—a proxy for businesses that are likely to employ workers—rose in late 2020 and have settled above 2019 levels ever since [Figure 2].

The post-COVID recession spike in business applications with planned wages is opposite to the experience following the Great Recession when business applications among likely employers fell and remained flat throughout the 2010s. Despite recent progress, the series is still below the historically high levels seen right before the Great Recession.

Figure 2

Business Applications in North Carolina’s Counties

Beyond the statewide figures, the exceptional growth in business application activity has been a shared feature across all 100 counties in North Carolina. Each county recorded growth in the annual number of business applications per 1,000 residents from 2019 to 2022 [Figure 3].[2]

Notably, the increase in application activity has been most pronounced in rural areas of the state, such as the Northeast and Sandhills regions. This suggests the upswing in entrepreneurial activity has not been exclusive to urban areas with larger populations and higher concentrations of economic activity. A similar pattern emerges in other states with rural counties seeing substantial growth in business applications, although the underlying factors driving this trend are still the subject of ongoing economic research.

Figure 3

Future Implications and Open Questions

Four years since the onset of the COVID-19 pandemic, new business activity appears strong with little signs of abating. Given the macroeconomic challenges over the past two years, from decades-high inflation to tighter financial conditions, the persistent surge in new business applications is even more remarkable.

Although these trends are promising for the economic outlook, a few open questions remain:

• What’s behind this sudden increase in startup activity?
• How many of these business applications will translate into actual new employer businesses?
• Will this wave of business activity reverse the multi-decade decline in business dynamism that preceded the COVID-19 pandemic?

To answer these questions with any degree of certainty will require more years of data. Business formation tends to be a volatile and slow-moving process with many startups failing, or at least not growing, over their first five to ten years. A small subset of new businesses grows rapidly and contributes disproportionately to job creation and innovation. Even with these limitations in mind, the pandemic-era surge in business applications has been a noteworthy development that appears to break with pre-COVID trends.