Key Findings
- 2022 was a difficult year for new businesses, amid inflation and talent shortages. The average 2022 business grew by just 1.1 employees in the first 12-months of operation, compared to 1.53 for businesses started in 2021.
- Manufacturers were resilient. Across all industries, 2022 businesses were 56% more likely to close within the first 12 months than 2021 businesses. Goods-producing industries were surprisingly resilient, however, with no change in their likelihood of closure within 12 months. Personal-services businesses started in 2022, however, were over 2.5x more likely to close within 12 months than 2021 businesses.
- Hispanic-owned businesses were resilient. The average Hispanic-owned businesses added about the same number of employees in the first 12 months from year to year – the only racial category not to experience a drop in 12-month headcount from 2021 to 2022.
Introduction
Entrepreneurs faced a more challenging environment in 2022 than in 2021 as inflation remained elevated, interest rates rose, and the talent market tightened.
As a result, new businesses hired less and failed more often in 2022, according to a Gusto analysis of nearly 2,800 businesses that got their start in 2021 and 2022. Businesses that started in 2021 hired an average of 1.53 employees during their first 12 months. That number dropped to 1.10 for 2022’s new businesses. Meanwhile, companies founded in 2022 were more than 50% more likely to shut down within 12 months as those founded in 2021.
Personal Services businesses – a wide-ranging category that includes things like salons, laundry, and photographers – had far less headcount growth. Goods-producing businesses, including construction and manufacturing companies, fared much better, boosted by a movement to localize supply chains after pandemic disruptions.
Hiring Slowed Dramatically in 2022
Amid high inflation, rising interest rates, and low unemployment, hiring slowed significantly in 2022. New businesses in 2022 started with 0.62 fewer employees, on average, than new businesses in 2021 and hired fewer workers during their first 12 months. Businesses in the 2022 cohort added an average of 1.10 employees during their first year, down from 1.53 employees for the 2021 cohort.
Even the fastest-growing 2022 businesses lagged their 2021 counterparts by a wide margin. The 95th percentile of 2022 businesses in headcount growth added an average of 6 employees in their first year, compared to 8 employees for the 95th percentile of 2021 businesses.
The impact of 2022’s challenging economic climate is apparent in how dramatically 2021’s new businesses slowed hiring the following year, adding an average of just 0.55 employees in 2022.
2022 Was a Good Time to be a Manufacturer, and a Bad Time to be in Personal Services
In addition to slowing down hiring, new businesses had more trouble staying afloat in 2022. Companies founded in 2022 were 1.56 times more likely to shut down within a year than companies founded in 2021.
Some kinds of businesses fared better than others. Goods-producing firms were possibly buoyed by a movement to localize supply chains after pandemic disruptions. The 2022 cohort of new, goods-producing businesses was even slightly less likely to shut down within 12 months than the 2021 cohort.
New Personal Services businesses were hit the hardest. The 2022 group was more than 2.5x times more likely to shut down within 12 months than the 2021 group. Why? Many businesses in the Personal Services sector are owned by owner-operators, some of whom might have taken advantage of the strong labor market in 2022 and early 2023 and gone to work for an employer rather than try to grow a business. That same strong labor market likely made finding talent for these services very difficult, making it tougher for these companies to operate effectively at scale.
Hispanic-owned businesses were Resilient in 2022
Hispanic-owned businesses were a bright spot in 2022. While many new businesses slowed hiring that year, the average
Other business owners saw declines in 12-month headcount growth. Black-owned business that started in 2022 hired 0.69 employees during its first year, down from 0.83 employees in 2021. Asian American and Pacific Islander (AAPI) owners saw the largest drop in 12-month growth, becoming more likely to lose employees in the first 12 months than gain. This could be influenced by the fact that AAPI businesses tend to start as employers and have more employees when starting.
In addition to having similar headcount growth between the two cohorts, the 2022 cohort of Hispanic-owned businesses were also much less likely to shut down than the 2021 cohort within the first year. This is a good sign for wealth generation and long-term employment creation.
How much more likely were 2022’s new business owners to shut down their firm within 12 months than 2021’s new business owners?
Women-owned Businesses Also Weathered the Storm
Woman-owned businesses were also resilient in 2022, growing more than those started in 2021. New businesses owned by women added an average of 1.54 employees in 2022, up from 1.10 in 2021.
There was also more variability in the growth of female-owned companies in 2022 than 2021, a reversal from male-owned companies. This means there was more “feast” and also more “famine” for women-owned businesses, even as the 2022 cohort saw higher headcount growth overall.
Conclusion
The stark differences in how new businesses performed in 2021 and 2022 show how much of an impact economic conditions can have on entrepreneurs, particularly when they haven’t had time to build the consistent revenues and profits that can protect against external challenges. While some of the conditions that made 2022 difficult for new businesses, like inflation, have eased, others, like higher interest rates, have remained. New entrepreneurs will have to keep those factors in mind when managing their businesses.
Methodology
We took survey response data from the 2022 and 2023 New Business Formation Surveys, which contain detailed data on businesses formed in 2021 and 2022, respectively. The survey data were matched with Gusto platform data to measure each company’s 12-month change in headcount, as well as whether they left the platform because they ceased operations.
To account for differences in platform and sample representativeness, each company was matched to its corresponding 2-digit NAICS code using either platform data or manual assignment based on the user-provided industry from the survey. Weights were then applied, based on the Census’ share of high-propensity business applications (HBA) in each year by 2-digit NAICS code, relative to the share of each NAICS code in the sample. The formula is below:
Weighti=(Share of HBA in NAICS)i/(Share of NAICS in sample)i
Note: Due to self-selection onto Gusto’s platform, Gusto’s rates of business closure tend to be significantly lower than rates of business closure that have been found in other research on this topic. The result for this analysis is that relative closure rates may look large, but they are derived from smaller starting rate than are generally reported in the literature.
