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 nationwide.

“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 Challenger.

“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 CNBC:

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 2008.

“Those who might have considered starting a business are looking at these statistics and deciding to seek traditional job opportunities,” said Challenger.

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 start-ups:

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