Economist: New business formation in Tennessee has record quarter

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New business filings have experienced three straight record quarters in Tennessee. Long-term economic changes and COVID disruption both likely play roles, a University of Tennessee economist said.

COVID disruption likely led many to form small businesses

JOHNSON CITY, Tenn. (WJHL) – Tennesseans formed new businesses at record numbers in the first three months of 2021, with the biggest growth coming outside Tennessee’s four biggest counties.

Statewide, the year-over-year growth in new business filings was 55 percent and marked a third straight record quarter, Dr. Bill Fox of University of Tennessee’s Boyd Center for Business and Economic Research said in a media conference call.

“Outside of those four big counties the growth rate was, get this, 77 percent,” Fox said. “So what we’re seeing is growth that’s spread broadly across Tennessee, much of it outside the most urban parts of the state and what this is saying to us is there’s a lot of confidence in Tennessee across the entire state.”

That statistic was a highlight during the call, which Tennessee Secretary of State Tre Hargett also joined.

Fox said nearly all economic indicators are strong statewide right now, with a well-publicized slow bounce back in the labor force being the primary exception. He said it’s possible some of that shortage — the statewide labor force is 80,000 people smaller than it was just before the pandemic — is COVID-related.

Despite the jump in new business formation, employment, shown by the red line, has yet to recover completely from the COVID-induced fallback.

“A lot of folks perhaps losing their jobs because of COVID or being affected by COVID decided to go out and start companies, and this could indeed be one of the reasons why other firms are finding it difficult locating new employees,” said Fox.

Fox said “output,” measured by the state’s gross domestic product, will return to pre-pandemic levels in the current quarter.

And he said tax revenues are experiencing very healthy growth rates. Statewide, that increase through the first nine months of fiscal 2021 is 14.7 percent compared to the previous year.

Some of that is attributable to Tennessee implementing stricter online sales tax collection rules last year, but Fox said a strong economy is likely to prevent a pullback.

UT economist Bill Fox

“As economic activity grows, we’ll continue to see this kind of, maybe not as strong but still healthy growth in tax revenues,” he said.

Still, Fox’s report released Thursday noted that about a quarter of the jobs lost during the pandemic — more than 90,000 — haven’t returned. The leisure and hospitality industry remains down by nearly 50,000 jobs.

Nationally, the report said there are 8.2 million fewer jobs than there were prior to the pandemic.

Whether many of the new businesses represent very small operations that may or may not grow into job producers is still unknown. Hargett did point out that sole proprietorships aren’t included in the numbers.

But both men said the state and the country are dealing with structural economic changes that existed before COVID-19, including huge shifts in the service industry. COVID just accelerated the change, Fox said.

Some of those shifts are likely contributing to the huge numbers of new business filings, he said.

“I think it is in part a move towards a more gig economy, a more entrepreneurial economy, but we’re certainly not going to maintain 55 percent growth rates.”

Dealing effectively with the changes will involve innovative programs and government investment in community college and the Tennessee Colleges of Applied Technology, Fox and Hargett said.

Those kinds of investments, some of which Tennessee has been a national leader in, will allow both recent high school graduates and returning students displaced in the changing economy opportunities to thrive economically.

In the short run, Fox said he expects employers who have bemoaned a lack of available workers to find some relief over the next several months. He cited the end of pandemic unemployment assistance set for July in Tennessee, vaccination progress making childcare more available and full in-person schooling as some of the factors that should spur labor force growth.

“When you put all those factors together we’ll see the employment market making much better progress towards the end of this year,” Fox said. “It’s still gonna take awhile to get back where we were. It’ll take awhile to get 80,000 people back working.”

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