Small business start-ups lowest rate in over 20 years

By Emmeline Zhao (Wall Street Journal)

The activity of new entrepreneurs plunged in the first half of 2010, falling to the lowest rate in more than two decades as more workers found employment or were driven away from start-ups by a feeble economy.

Start-up activity fell to an average 3.7% in the first two quarters of this year, down from 7.6% in the first half of 2009 and 9.6% in the second half, according to a survey of about 3,000 job seekers by global outplacement and executive coaching firm Challenger, Gray and Christmas, Inc. Many of those surveyed are former managers and executives.

“It is difficult to pinpoint the exact reason behind the decline in start-up activity among former managers and executives,” Challenger Chief Executive John Challenger said in a statement Monday. “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.”

The 3.4% first-quarter start-up rate and the 3.9% in the second quarter mark the lowest first-half since Challenger started recording data in 1986. The highest half-year start-up rate was 21.5% in the first six months of 1989.

While the economy recovers but remains fragile, entrepreneurism drops as fewer job-seekers look to start their own businesses and secure employment. Those already self-employed are less confident about their outlooks — a small business optimism index fell to 92.2 in June from 89 in May, according to the National Federation of Independent Business.

The annual average rate of job seekers starting a business fell with the onset of the recession — from 8.1% in 2007 to 5.1% in 2008. The number of self-employed workers peaked at more than a seasonally adjusted 9.7 million in June 2007, just before the recession, but fell to almost 8.9 million in June 2010, according to the Bureau of Labor Statistics. The rate of new entrepreneurship dropped steadily through the first six months of 2010 from 9 million.

The Challenger survey shows an increase in new entrepreneurs in the third and fourth quarters of 2009 — 11.8% and 7.3%, respectively. The total number of self-employed workers jumped almost 3% to more than 9.1 million in December 2009 from just under 8.9 million that June.

Meanwhile, as fewer people looked to self-employment in the first half of 2010, the number of payroll workers increased by a seasonally adjusted 1.3 million between December 2009 and June 2010 in nonagricultural industries.