Did You Know that Business Churn Is Up?

The U.S. Small Business Administration (SBA) releases quarterly statistics on business churn.  What is this and why should you care about it? Business churn is defined as changes in the number of births and deaths of firms in this country. When business births (startups) increase and business deaths decline, the resulting rise in the number as business churn is good. “Business churn is needed to keep the economy from stagnating,” says the SBA.

Business births are vital for employment creation. The government says that small firms (20 to 499 employees) were responsible for three-quarters of job creation from the end of the economic downturn (from 2009 on). However, now (since 2011) even smaller firms (1 to 19 employees) are creating jobs.

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Business bankruptcies—one of the ways in which businesses die—are on the decline for firms of all sizes. In the last quarter of 2011, there were 11,149 bankruptcies. In the first quarter of this year, there were only 10,998, showing that business deaths are on the decline.

Clearly, things are moving in the right direction. However, we are nowhere near pre-recession numbers in business creation. The number of unincorporated businesses created in 2011 is markedly below the number in previous years: 10,586,000 in 2006; 10,413,000 in 2007; 10,080,000 in 2008; 9,831,000 in 2009; 9,681,000 in 2010; and only 9,449,000 in 2011. It’s too early to pop the cork and celebrate the return of a strong economy, despite the statistical rise in business churn.

Word on the street (from small business owners I know) is that they are largely still just hanging on. They aren’t expanding. They aren’t hiring. They aren’t buying new equipment (other than what is absolutely necessary). There are “for rent” signs everywhere, with storefronts and office space showing significant vacancies. My personal view on business churn is not as rosy as the SBA’s, but I sure hope things change real soon!