New businesses forming more slowly as financing costs rise

By Theresa Sheehan, Econoday Economist
April 14, 2022

Applications for Employer Identification Numbers (EINs) are fading on a monthly seasonally adjusted basis. Ever since it was clear that mortgage interest rates are rising and big gains in home values are easing up, would-be entrepreneurs are less inclined to refinance their homes and take out some equity to start a business. January 2022 saw a rush but this has been followed by declines in February and March that are likely to continue into the coming months. Even where other financing is sought, the cost of borrowing is up. The other possible cause of fewer applications for EINs is that rising compensation — and in some cases more flexible work arrangements — are making working for someone else more attractive again. Nonetheless, it is notable that applications are almost twice the number seen in March 2020 (257,673) just when layoffs and furloughs made striking out on one’s own more attractive than waiting to see if the job came back.

Compared to a year-ago, the unadjusted number of new applications is down 8.4 percent to 558,857 after 610,377 in March 2021 when this was at a record high. The data hint that while the pace of business formations may be lower at present, the numbers are likely to remain above pre-pandemic levels and could keep some skilled workers out of the labor force.