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A new survey shows that US start-up activity plummeted in the
first half (H1) of 2010 as would-be entrepreneurs were either scooped up by
employers or scared off by fragile economic conditions, a tight lending market
and uncertainty over the sustainability of the recovery. It was the steepest
fall in at least 20 years.
Results of a survey of job seekers released Monday by global
outplacement and executive coaching firm Challenger, Gray & Christmas, show that
an average of 3.7 per cent opted to start their own business in the first half
of 2010. That was down from 7.6 per cent in the first half of 2009 and the 9.6
per cent start-up rate averaged over the last two quarters of 2009.
The 3.4 per cent start-up rate in the first quarter and the 3.9
per cent rate in the second quarter represent the lowest two-quarter average on
record, according to Challenger, which began tracking in 1986. The highest two
quarter average on record occurred in the first half of 1989, when 21.5 per cent
of job seekers ended up starting a business.
The start-up activity figures are part of the Challenger Job
Market Index, a quarterly survey of approximately 3,000 job seekers, many of
whom were former managers and executives from a wide variety of industries
“It is difficult to pinpoint the exact reason behind the
decline in start-up activity among former managers and executives. On one hand,
it could be that the job market has improved to the point that many do not feel
compelled to take the risk of going it alone. Then there is the fragility of the
recovery and the uncertainty that comes with it. Many small business owners are
increasingly pessimistic about business conditions and still find it difficult
to get a loan,” noted John A. Challenger, chief executive officer of
Challenger, Gray & Christmas. “The decision of starting a business involves
so many factors, that trying to identify one or two is an exercise in futility.
However, the trends over time suggest that start-up activity is at its lowest
just as a recession hits. In the months immediately following the end of the
recession, when unemployment is at its highest and hiring is virtually
non-existent, we see a spike in job seekers starting businesses,” said
“When the recovery reaches the point when employers begin
hiring, but the economy remains relatively fragile, we tend to see a drop in
entrepreneurism as job seekers start to see success in their searches. As the
economy continues to gain strength, start-up activity begins to grow again, as
conditions for such ventures become more inviting,” he continued.
“Right now, we are in the early stages of recovery when the
fundamentals of the economy are still pretty shaky, but employers are just
starting to add workers back to their payrolls.”
The firm said instability of the economy at this stage of the
recovery is impacting the outlook of those already running small businesses. In
the latest reading of small business confidence conducted by the National
Federation of Independent Business (NFIB), the optimism index fell from 92.2 in
May to 89 in June. The NFIB optimism index found that a net of just 1 per cent
of small firms are planning to hire in the coming months.
With 14 million Americans out
of work, some of the nations top economists and thinkers are calling for
immediate action on the faltering economy. Alan Blinder, a former Fed vice
chairman, is one of them. He and Mort Zuckerman share their opposing views with
Making matters worse for small business owners is a dramatic
decline in the amount of lending to these firms. The New York Times
recently cited federal data showing that lending to such small businesses fell
to less than $670 billion in the first quarter of 2010, down from a
pre-banking-collapse level of more than $710 billion in the second quarter of
“Those who might have considered starting a business are
looking at these statistics and deciding to seek traditional job opportunities,”
The latest figures on self-employment from the Bureau of Labor
Statistics reveal a similar downward trend in entrepreneurism. Seasonally
adjusted data show that after the number of self-employed reached a
pre-recession peak of 9,773,000 in June 2007, it has since fallen 9.0 per cent
to 8,889,000, as of June 2010. There was a slight surge in self-employment in
the second half of 2009, which saw the number of people in this category
increase nearly 3.0 per cent from 8,898,000 in June to 9,135,000 in December.
“Since reaching 9.1 million in December, the number of
self-employed has steadily declined through the first six months of 2010. During
the same period, payroll employment grew by 889,000 jobs in the first stretch of
steady job-creation since the recovery began, thus offering support to the
notion that the decision to start a business is being impacted by the
availability of jobs,” said Challenger.
This Finfacts article includes details on research on US