Posted by: Josh Lehner | May 3, 2023

Strong Start-Up Activity Continues

Last week we talked a bit about the labor force outlook and how Oregon appears to be at or near its potential given the strong cyclical economy and aging demographics. Besides labor, the other major driver of economic growth is productivity, which requires business investment and gains in the various types of capital: financial, human, natural, physical, and social. Historically a key source of these gains comes from new businesses. Generally new firms bring new ideas, and/or improved processes that are more efficient to the marketplace. Older or more rigid businesses get left behind as part of the creative destruction process. Start-up activity had clearly been trending down for decades leading up to the pandemic. Since then, new business formation has increased noticeably and appears to be sticking, at least so far as seen in the latest edition of the Graph of the Week.

Running a business is hard. Many firms do not make it beyond their first year or two. Only a couple eventually grow to become a huge, successful firm. As such, one way our office thinks about this is not at the individual firm level, but for Oregon’s economy overall. Even if the probability that any given business will be successful remains the same, if you have more ping pong balls in the hopper, your overall probability that one of them will be successful is higher. And while simply having more businesses does not necessarily lead to increased business investment and productivity gains, it sure is an encouraging signal about those possibilities in the years ahead.

In terms of the outlook for start-up activity there are some crosscurrents. Personal savings and home equity are the most common funding source for new businesses. While those are higher today, and can continue to support and drive this ongoing strength in start-up activity, the impacts of high inflation, rising interest rates, and recession risks likely weighs on new activity a bit. Additionally, we know venture capital and banking lending is tighter today than earlier in the pandemic, which will likely slow new business formation as well.

Now, on the upside two items stand out. One is the potential for a general shift in the economy, especially related to working-from-home type jobs and businesses, which allows more people to test out their ideas if they so choose. Two is demographics. While young college dropouts may be the stereotype of who are entrepreneurs, most are actually middle-aged. Research from the Census Bureau finds the average age of the entrepreneur at founding is 42 and the average age of the most successful of the new businesses is 45. Obviously, there is a range of ages and outcomes, but on a demographically-adjusted basis entrepreneurship rates peak in the late 30s and early 40s. The fact that the large Millennial generation is now in their 30s and increasingly in their 40s, that is a big demographic tailwind to new business formation. A key here is that entrepreneurs tend to get a bit of work experience and in doing so they identify a need or a new way to do things that is more efficient, and then go out and try to improve that thing they have identified, and hopefully make money along the way.

Finally, as noted at the top, if we think about the capital and labor as the nuts and bolts of growth, there are a few implications given we have a pretty good idea where labor stands today. It means attracting and retaining talent is even more important (and getting the expected rebound in migration is huge for the long-run outlook). It also means capital takes on extra importance, and in terms of the range of possible outcomes, it is more of a wildcard at the moment.

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