By Dr. Uric Dufrene, Sanders Chair in Business and Professor of Finance, Indiana University Southeast
The Covid-19 pandemic has led to a proliferation of self-employment and small business formation. In a recent Wall Street Journal article (In the Covid Economy, Laid-Off Employees Become New Entrepreneurs – WSJ), the introductory sentences sum up the situation quite well, “The coronavirus destroyed jobs. It also created entrepreneurs.” The article cites Census Bureau data that applications for businesses with no employees surged 32% in the first 9 months of 2020. While we do not have access to non-employer business data at the county level just yet, we do have establishment and payrolls data at the county level as recently as the second quarter of 2020.
Whenever we are talking about the state of the economy, or the general outlook, the focus is usually on the number of jobs. For example, the monthly employment report released by the Bureau of Labor Statistics is probably the most closely watched economic indicator. Equity market reaction can be quite volatile when the report is released on the first Friday of the month.
In reviewing the latest Quarterly Census of Employment and Wages data, I did notice an interesting pattern developing, and one that is positive for Southern Indiana. Rather than focus on the number of jobs, we are going to examine the change in the number of establishments across Southern Indiana. In this case, establishments include firms that have employees. These data do not include self-employed entrepreneurs mentioned in the Wall Street journal article, but we are able to get a pulse of overall economic development. As a region, are we seeing more net business formation, or are business closures outpacing any new business development?
In the second quarter of 2020, the five counties (Clark, Floyd, Harrison, Scott, and Washington) of Southern Indiana had the second highest, among all Indiana metro areas, in the percentage change in business establishments from the previous year. In absolute terms, Southern Indiana added 135 establishments from the previous year during the second quarter and added 203 in the first quarter. On a percentage basis (this allows us to control for the metro area size), the five counties of Southern Indiana (2.4%) were outpaced only by the Lafayette-West Lafayette (4.8%) metro region.
When we examine all of 2020, both the first and second quarters combined, we see a similar result. The average percentage change from the previous year, in new establishments, for Southern Indiana (2.9%) was the second highest among all Indiana metro areas. Like the 2nd quarter of 2020, Lafayette-West Lafayette (5.7%) had the highest gain for all of 2020.
Going back just a bit further, we see a similar pattern. Over the past 4 quarters, Southern Indiana had the second highest percentage change (2.5%) in establishments from the previous year. Lafayette-West Lafayette had the highest (4.1%). As a comparison, nine other metro areas across Indiana had either negative or flat changes in establishments over the same time-period. So, a gain of 2.5% is no small feat!
What does all this mean for Southern Indiana? In a nutshell, this is good news. A region can only sustain long-term economic development if business formation is outpacing business deaths. New establishments replace old establishments, and investment, both from the outside and within, signal an overall robust economic development environment. In a recent article in the Southern Indiana Business Source (November-December 2020), I documented the strong net migration to Southern Indiana. These data combined with the recent activity on the change in establishments send positive signals about the growth trajectory of Southern Indiana.
Data source: STATS Indiana Quarterly Census on Employment and Wages.