U.S. Department of the Treasury

Eric Van Nostrand, Assistant Secretary for Economic Policy (P.D.O.)

Small businesses play a disproportionately large role in our labor markets: half the Americans that work for a private business work for a small one.^[1] And with entrepreneurship surging since the pandemic, that role is poised to grow further. Americans are finding it an especially good time to start a small business. This note explores the impact small businesses and entrepreneurs have had on the U.S. economy in the post-COVID economic expansion. Our key conclusions:

• Small businesses created over 70 percent of net new jobs since 2019. In the previous business cycle, small businesses created 64 percent of net new jobs.
• Small business optimism is rebounding as inflation falls. Multiple measures of business optimism show substantial increases in recent months. More than 70 percent of small business leaders expect revenues to grow over the next year, the most since the pandemic.
• Entrepreneurship continues to surge: the United States is averaging 430,000 new business applications per month in 2024, 50 percent more than in 2019. The subset of applications for businesses most likely to hire employees has also risen to 140,000 per month, 30 percent more than in 2019.
• Entrepreneurs are also growing more diverse: forty-three percent of self-employed Americans are female, more than ever before. Black, Asian, and Hispanic shares of self-employed Americans are also near all-time highs. Opportunity in this expansion is applying more broadly than before.

Important headwinds remain. Credit for small businesses is still historically tight, although that trend has eased somewhat in recent months. And business owners, like households, still face costs that are too high. But given the recent progress, it is important to recognize the central role small businesses play in the U.S. economy.

Small Businesses and Job Creation

Small businesses account for about half of total private employment. Figure 2 shows that businesses with less than 500 employees account for about 51 percent of private employment. Firms with fewer than 250 employees account for 44 percent of the total, and firms with fewer than fifty employees account for 27 percent of the total.

Figure 1. Small businesses account for about half of total private employment.

_{Source: Bureau of Labor Statistics, Business Employment Dynamics using firm-level data; U.S. Treasury calculations.}

Furthermore, small businesses have created a disproportionate share of jobs since the pandemic, contributing 71 percent of net private job gains since the previous business cycle peak in the fourth quarter of 2019. That is up from a 64 percent share of net new jobs in the Great Recession and ensuing recovery, as shown in Figure 2. Indeed, the smallest firms are playing an especially large role this time. Start-ups created 26 percent of total new jobs (net of firms that closed), up from 19 percent last cycle, while existing firms with fewer than fifty employees created 18 percent, up from 9 percent last cycle. The importance of start-ups this cycle is underscored by the recent surge in new business applications, discussed later in this note.

Figure 2. Small business contributed 71 percent of total job creation this business cycle, up from 64 percent in the prior recession and recovery.

Source: Bureau of Labor Statistics, Business Employment Dynamics (BED); U.S. Treasury calculations.

Notes: The contributions shown are those of various “small business” subcomponents to overall net private jobs gains as measured in the Business Employment Dynamics database, calculated using firm-level data. “Startups less Shutdowns” is job gains from opening firms with fewer than 500 employees minus job losses from closing firms with fewer than 500 employees. Contributions of existing firms are job gains from expanding firms less job gains from contracting firms. Data disaggregated by firm size from the BED are only available through 2023:Q4.

Small Business Optimism and Financing

In 2024, small business optimism is on the rise as inflation concerns have eased and broader consumer spending and business investment remain robust. Figure 3 plots the Small Business Optimism Index from the National Federation of Independent Business (NFIB), an effort to quantify the outlook among small business owners derived from a monthly survey of 500-1500 small business owners. The Index is based upon owners’ responses to questions regarding their plans to hire and invest and their expectations for the economy, the labor market, and credit conditions. The Index has trended downward since 2018 as owners cited higher inflation as a principal source of concern. This trend underscores the challenges that higher costs pose for small business owners. But in 2024, encouragingly, the Index has rebounded to its highest level in two years as inflation has eased.

Figure 3. NFIB Small Business Optimism Index has been trending down since 2018 but turned up in 2024 as inflation eased.

_{Source: National Federation of Independent Business.}

Indeed, the 4.2 percent increase in the past six months is the largest such increase since the post-pandemic labor market rebound in 2021. 

The U.S. Chamber of Commerce and MetLife publish an alternative Small Business Index (Figure 4), which aims to measure optimism based on a similar set of questions posed to a sample of 750 small business owners and managers. This measure did not rebound as quickly from the pandemic, but has been climbing steadily since the pandemic, in considerable tension with the NFIB survey. But like the NFIB survey, it has also had a strong 2024, and reached a new post-pandemic high in the second quarter of 2024.

Figure 4. The U.S. Chamber of Commerce’s Small Business Index has been climbing steadily since the pandemic, reaching a post-pandemic high in the second quarter of 2024. 

_{Source: U.S. Chamber of Commerce / MetLife Small Business Index.}

The Chamber survey directors cite increased confidence in the future business climate as a principal driver of renewed optimism. Small business owners are “increasingly positive about their cash flow, hiring, and revenue expectations.”^[2] Figure 5 shows that the shares of small business owners expecting higher revenue and planning to increase investment next year are at or near post-pandemic highs.

Figure 5. The shares of small business owners expecting higher revenue next year and planning to increase investment next year are both near post-pandemic highs.

_{Source: U.S. Chamber of Commerce / MetLife Small Business Index.}

One important headwind that small businesses have faced since the pandemic is that credit conditions have tightened. This is true of borrowers in general, but especially for less established firms. Figure 6 shows the balance of loan officers reporting easing versus tightening credit to small firms. While more still report tightening credit rather than easing as of the third quarter of 2023, the balance has improved meaningfully this year as lenders and borrowers anticipate easier financial conditions.

Figure 6. Loan officers report that they have generally tightened lending conditions for small firms since the pandemic, but this trend has slowed meaningfully since the start of 2024.

_{Source: Federal Reserve Board, Senior Loan Officer Opinion Survey.}

_{Notes: This measure is the number of loan officers reporting easing standards for C&I loans to small firms as a share of all loan officers in the survey, less the share of loan officers reporting tightening standards.}

The relationship between small business optimism and small business credit conditions is important. A rise in small business optimism tends to precede an easing of small business lending by 9-12 months, as shown in Figure 7. There is no reason to suspect a causal relationship, but this pattern probably follows from the fact that similar factors that drive increases in optimism—such as confidence in near-term revenues, as shown in Figure 5—tend to also contribute to the easier flow of credit to smaller business, but a little bit later. For instance, factors that portend future economic strength would lead to optimism today and an easing of credit soon, while factors that portend a recession might have the opposite effect. If a similar pattern persists, the recent surge in small business optimism—consistent with the broad expectation of easier financial conditions—may bode well for small business lending in the year to come.

Figure 7. Changes in small business optimism tend to lead the easing of credit conditions for small businesses by about 9-12 months. ^[3]

_{Source: National Federation of Independent Business; Federal Reserve Board, Senior Loan Officer Opinion Survey; U.S. Treasury calculations.}

_{Notes: The correlations shown are between the four-quarter percentage change in the NFIB Small Business Optimism Index and the four-quarter moving average of the net credit easing measure for small businesses depicted in the previous figure, from 2001:Q1 to 2024:Q2.} 

Surge in U.S. Entrepreneurship

The encouraging outlook for small businesses may also be drawing more Americans into starting businesses of their own. The post-pandemic economy, with its higher levels of household wealth and renewed support for small businesses, has kick-started entrepreneurship. There has been a well-recognized^[4] surge in applications to start new businesses since the pandemic, with over 19 million new applications since the end of 2020. While the pace of new business applications has eased somewhat from its heights last year, as shown in Figure 8, that pace remains well above the steady pre-COVID rate. While business formation data for the pandemic period are not fully available, application rates are predictive of actual business formations. Actual business formations from the subsequent eight quarters have a correlation coefficient of +0.9 with applications from likely employers.^[5]

Figure 8. New business applications have surged since the pandemic, including for those firms likely to hire employees soon.

_{Source: U.S. Census Bureau, Business Formation Statistics.}

_{Notes: Applications with planned wages are those that include an explicit date when wages will first be paid. “High-propensity” business applications are those the Census Bureau considers likely to pay wages, including those with planned wages as well as other indicators.}

The surge in business applications following the pandemic is so sharp that one might wonder whether it truly reflects a rise in entrepreneurship, or whether it may be some measurement artifact related to a pandemic-era distortion. However, several pieces of evidence suggest that the surge is real and no well-supported alternative explanation has been offered a few years into this trend.

First, as shown in Figure 8, the surge is not confined to the broadest set of business applications, which includes many sole proprietorships or other entities that may not fit prevailing understandings of a “small business” (left panel). A similar surge is present for those applications the Census considers having a high propensity to pay wages (middle panel), as well as those who indicate a date on which they will begin paying wages (right panel). Second, the surge follows the patterns of broader post-COVID economic changes. Haltiwanger (2022)^[6] showed that the surge was concentrated in industries likely well suited to a work-from-home environment, such as non-store retailers and professional, scientific, and technical services. Decker and Haltiwanger (2023)^[7] examined the geographic distribution of applications and showed they were concentrated in “donuts” around urban centers, consistent with post-pandemic residential and workplace shifts. CEA (2024)^[8] examines a broader set of administrative data that helps establish the veracity of the surge.

While much more work will be done to understand the surge, the evidence suggests that there is a real impulse here. This is not simply a rebound from the pandemic. There are many candidate explanations for the surge: the prevalence of remote work or the gig economy making the decision to start a business less costly or risky, the rise in household wealth experienced since the pandemic enabling more people to risk opening businesses, or even a broader shift in cultural attitudes toward risk-taking. In any case, we observe that more Americans are starting small businesses at a faster rate just as those businesses are playing a growing role in our economy.

The new wave of start-ups is especially encouraging against the backdrop of a challenging longer-term trend that has concerned economists in recent decades—a decline in business dynamism, including small business activity.^[9] A renewed boom in start-ups and small business activity is welcome on its face, but especially so when it helps reverse a worrying trend. Indeed, the growth in small business formation parallels other improvements in business dynamism, including historically high quits rates and hiring rates in the labor market.

Diversity of Self-Employed Workers

One underappreciated aspect of the entrepreneurship surge is that the population of Americans working for themselves is growing more diverse. Self-employed workers reflect an important subset of small business owners: those who work for profit in their own unincorporated business.[10] Historically, this group has been dominated by White Americans and men. But today, it is more diverse than ever before. Women make up 43 percent of self-employed Americans, more than ever before (Figure 9). The opportunity to start a business in this expansion seems to apply especially broadly, a trend consistent with other historically fair aspects of the post-COVID recovery.[11]

Figure 9. Forty-three percent of self-employed Americans are women, more than ever before.

_{Source: Bureau of Labor Statistics, Current Population Survey; U.S. Treasury calculations.}

_{Notes: Non-agricultural industries. Data are smoothed with a three-month moving average. Data are not seasonally adjusted, though seasonal adjustment with X-13-ARIMA has a negligible impact on the series.}

The share of self-employed Americans who are Black is also near its all-time high after surging throughout the expansion (Figure 10). This observation is consistent with data from the Survey of Consumer Finances showing that Black business ownership grew faster between 2019 and 2022 than over the previous thirty years.[12]

Figure 10.The Black share of self-employed Americans is also very near its all-time high after surging throughout the expansion.

Source: Bureau of Labor Statistics, Current Population Survey; U.S. Treasury calculations.

Notes: Non-agricultural industries. Data are smoothed with a three-month moving average. Data are not seasonally adjusted, though seasonal adjustment with X-13-ARIMA has a negligible impact on the series.

Figure 11 shows the change in the racial distribution of self-employment more broadly over the past five years. The White share of self-employed Americans, which has long been disproportionately high, fell 3.7 percentage points from 71.6 percent to 67.9 percent. Black, Asian, and Hispanic Americans now all play a greater role in self-employment.

Figure 11. The White share of self-employed Americans has fallen 3.7 percentage points over the past five years, as Black, Asian, and Hispanic Americans all play a greater role in self-employment.

_{Source: Bureau of Labor Statistics, Current Population Survey; U.S. Treasury calculations.}

_{Notes: Non-agricultural industries. Data are smoothed with a three-month moving average. Data are not seasonally adjusted, but the July-July change is depicted.}

Conclusion and Policy Outlook

Small businesses have long played a critical role in our economy, but that role has grown in the post-COVID expansion—even as businesses face the headwinds of still-too-high costs. But the recent increases in optimism should give us more confidence in the economic outlook. And given the revealed preferences of Americans applying to start new businesses at the fastest rate on record, it is an especially good time to run a small business in the United States.

Despite recent improvements, important challenges for small businesses remain. Credit standards for lending to small businesses are still too tight and could prove a meaningful barrier to further small business growth if lenders do not relax lending conditions. And while pandemic-era federal support for small business lending like the Paycheck Protection Program has passed, ongoing support like the Small Business Administration’s (SBA) 7(a) and 504 guarantee programs for small business lending will continue to support the sector. These programs have experienced low charge-offs in recent years (Figure 12), reducing the fiscal cost of the support and increasing lenders’ confidence in loans supported by the programs.

Figure 12. Charge-off rates for the SBA’s flagship small business loan guarantee programs are at their lowest on record.

Source: Small Business Administration.

Notes: Volume of guaranteed loans by fiscal year. 2024 is fiscal year-to-date as of July 2024.

The Biden-Harris Administration remains committed to strengthening American small businesses. The implementation of the Inflation Reduction Act,^[13] CHIPS and Science Act,^[14] and the Bipartisan Infrastructure Law^[15] are channeling public capital and encouraging more private investment in economically disadvantaged communities that larger corporations may overlook. The SBA is guaranteeing more small-dollar 7(a) loans to help the smallest businesses,^[16] while the Consumer Financial Protection Bureau has finalized a new rule^[17] to make small business lending more transparent. Finally, the Administration’s pro-competition agenda is explicitly pro-small business, including by banning the noncompete agreements that reduce labor market dynamism and new business formation.