New Business Formation Increases in Wyoming
in 2010 and 2011

by: Sherry Wen, Senior Economist

See Related Tables and Figures

New business formation in Wyoming began to recover in 2010 and 2011 after declining in 2008 and 2009 during the state's economic downturn. However, the number of new firms and the growth rate were smaller than during the recovery period following the prior economic downturn in 2001. The number of new firms in construction has declined for four years. In 2011, the number of new firms in this industry reached its lowest level of the past 13 years. The construction industry's extended contraction has never been seen before.

New business formation and the rate of business formation are important indices of economic growth. They represent new sources of jobs, wages, and tax revenues for the state and local communities. The Research & Planning (R&P) section of the Wyoming Department of Workforce Services has been conducting the new business formation research every two years since 1995.

During the time that followed the national Great Recession of 2007 to 2009, the recovery of the nation's economy has been the weakest since World War II (Wiseman, 2012). The research presented in this article will provide insight on Wyoming's recovery during this same period by examining new businesses that opened and the job opportunities they provided in Wyoming in 2010 and 2011, as the nation began to recover from the Great Recession. This article also explores the industries and locations in which new firms chose to do business, since these factors may indicate the direction of economic expansion. Finally, business survival is discussed.

For purposes of this research, a new business is defined as one that did not exist before but now actively provides goods or services and hires employees and pays them wages. New branches of existing firms or the reopening of firms after temporarily closing are not considered new firms.

Previous research (Wen, 2010) used quarterly historical data to examine the relationship between Wyoming's new business formation and the business cycle (National Bureau of Economic Research, n.d.). This research only focuses on annual data to examine the recovery on new business formation. New business formation in Wyoming declined in 2008 and then reached its lowest point in 2009 with only 1,832 new firms, or 520 fewer (-22.1%) than the peak year of 2007 (see Figure 1).

After two years of decline in 2008 and 2009, the number of new firms in Wyoming increased in 2010 and 2011. However, new business formation recovered at a much slower rate than in 2004 and 2005, Wyoming's previous recovery years. The average annual growth rate for new firms during 2004 and 2005 was 7.2%, compared to only 4.2% in 2010 and 2011 after the most recent recession. The number of new businesses in 2010 and 2011 (3,932) was also significantly less than in 2004 and 2005 (4,313).

A formation rate is calculated by dividing the number of new firms by the number of total firms. During the 12 years before 2009, Wyoming's formation rate remained relatively stable, ranging from 8.8% to 9.8%. In 2009, the formation rate dropped to a record low of 7.3% before increasing to 7.8% in 2010 and 7.9% in 2011. While the formation rate increased during this period, it was still lower than the formation rate during pre-recession years. These low rates may reflect the impact that the recent national recession had on new business formation. The financial crises may have largely limited the ability to get loans to start a business (Alden, 2011), while the uncertainty of the national economy may also have affected business owners' confidence on expansion.

Wyoming added 1,945 new firms in 2010, a 6.2% increase over the previous year (see Figure 2). These new businesses contributed a total of 7,801 initial jobs and $170.6 million in wages, which accounted for 2.9% of state average employment and 1.5% of total wages. In 2011, the total number of new firms increased slightly (2.2%) to 1,987 firms, but the number of initial jobs (6,991) and total wages ($141.4 million) associated with these new businesses decreased compared to 2010. These significant decreases in jobs and wages could be due to the proportion of smaller sized and lower paying firms. The average firm size in 2011 was 3.5 jobs, down from 4.0 jobs per firm in 2010 and the lowest since 1993 (the first year for which data are available). The average firm size peaked in 1999, with 4.8 jobs per new firm.

The southwest region of Wyoming has been the fastest growing region in the state since 2000 (see Figure 3). In 2011, the southwest region added 511 new firms (25.7% of the state total; see Table 1). The southeast was second with 476 firms (24.0%), followed by the central region with 345 firms (17.4%). The northeast region expanded by 304 firms (15.3%), the first time this region lagged behind central region in the past six years. The northwest was the last, gaining 258 new firms (13.0%). During the past two years, all regions recovered slowly from their record low 2009 levels, except the northeast, which continued a declining trend that began in 2007.

Historical data suggest that even though the southwest has been the fastest growing region in the state, the southwest has shown no significant signs of recovery. This region experienced the largest decline from its peak year of 2006 (690 new firms) to 2009 (498 new firms; -27.8%). The number of new firms remained flat from 2010 to 2011.

At the county level (see Table 1), Laramie County added the largest share of new firms (314, or 15.8%) in 2011 and Natrona County added the second largest (251, or 12.6%). However, the new firms in Natrona County contributed the largest portion of related jobs (1,161, or 16.6%) and wages ($25.4 million, or 17.9%). Laramie County gained 886 jobs (12.7%) and $18.0 million (12.7%) in wages, both ranked second among all counties. Teton County was third in terms of new business formation with 184 new firms (9.3%) added in 2011, but its associated jobs (447, or 6.4%) and wages ($14.2 million, or 10.1%) were behind Campbell County, which gained 596 jobs (8.5%) and $16.3 million (11.5%) in wages, with only 123 (6.2%) new firms.

Construction has led all industries in new business formation for years (see Figure 4). In 2011, construction again contributed the largest share of new business (310 new firms, or 15.6% of the state total), associated jobs (1,480 jobs, or 21.2%; see Table 2), and wages ($25.9 million, or 18.3%). However, construction was the only industry that experienced a decline for four consecutive years in terms of new business formation. The number of new construction firms in 2011 (310) was the lowest in more than a decade and was only near half of its pre-recession peak year's level (614 new firms in 2007). This long and steep contraction has never been seen before. The most recent housing and finance crises may have limited the recovery and expansion of this industry.

Professional & technical services added the second largest number of new firms with 299 (15.0%) in 2011, almost back to its peak level (301 new firms in 2008). Other services ranked third, with 212 new firms (10.7%) in 2011, which was the record high in its history.

Accommodation & food services contributed the second largest number of jobs (1,370, or 19.6%), followed by health care & social assistance (647 jobs, or 9.3%). Professional & technical services and mining were the second and third largest wage contributors with $20.0 million (14.2%) and $19.8 million (14.0%), respectively.

In the past two years, the new business formation in mining experienced a slow but steady recovery from its record low of 66 in 2009. The number of new firms in mining increased 18.2% to 78 in 2010 and 10.3% to 86 in 2011. These new firms added 330 associated jobs in 2010 and 512 associated jobs in 2011.

Nearly half of the 3,932 new firms in 2010 and 2011 were established in the southwest (25.6%) and southeast (24.0%) regions of the state (see Table 3). However, the industry distribution around the state was quite different. More than a quarter (26.8%) of new mining firms chose to locate in the central region, while only 9.8% of all mining firms opened in the northwest. On the other hand, 23.9% of new agriculture firms chose the northwest, while only 5.6% were located in the central region. As the fastest growing region in Wyoming, the southwest also gained the largest share of new firms from a wide range of industries, including arts, entertainment, & recreation (46.0%), finance & insurance (41.3%), and retail trade (33.0%). Several factors influence the uneven distribution of industries, such as natural resources, transportation conditions, geographic location, population, and special construction projects, such as pipelines, wind turbines, and highways.

An industry's formation rate shows what percentage of firms in that industry are the result of new growth. The formation rates for some industries fluctuated from year to year; for example, the formation rate for mining was 19.2% in 2001 and 5.8% in 2009 (see Table 4). Most industries, however, had relatively stable formation rates from 2000 to 2011. In 2011, five industries had formation rates higher than 10.0%: educational services (13.9%), administrative & waste services (12.3%), transportation & warehousing (11.8%), other services (11.8%), and professional & technical services (11.6%).

The previous sections of this article analyzed the number of new firms that opened for business in 2010 and 2011, along with their geographic and industry distributions. This section examines the survival of these new businesses. Due to limited information on business transactions such as selling, merging and dividing, firm survival is only considered relative to the original owners.

If a firm is still reporting its employment and wage information to the Wyoming Department of Workforce Services' Unemployment Insurance Tax Division one year after opening, it is considered to have survived one year. The one-year survival rate is calculated by dividing the number of one-year survivals by the total number of firms established during that year. The same method is used to define survivals and survival rates for two, three, or more years. In order to obtain a general pattern of survival rates in Wyoming and avoid variation in individual years, this analysis used all records since fourth quarter 1992 that meet the specific requirement for each survival rate.

Several factors could impact a firm's survivability, such as the supply and demand situation for a specific product or service the firm provides, competition from similar businesses, government policies, supply of required labor, and location. Information about the prospects of businesses surviving in a given industry and location would help individuals who are planning to open a business. This information may also help the Wyoming Business Council and other public and private funding sources for new ventures to develop practical strategies to ensure greater return on investment when establishing a new firm.

Research shows that survival rates decrease as the number of years a firm is in business increases (see Figure 5 and Table 5). Statewide, more than half (55.0%) of the new firms survived two years after opening and more than one-third (39.2%) were still active after four years. Health care & social assistance was the only industry that had more than 70.0% of its new firms still in business two years after opening. Firms in agriculture had the second highest two-year survival rate (68.2%), followed by firms in real estate & rental & leasing (65.3%). Construction had the lowest two-year rate, with only 44.0% of all firms still active. This may be directly related to the large portion of temporary projects related to this industry, such as roads, oil and gas pipelines, buildings, wind turbines, and more. For the long term (four years or 10 years), firms in utilities did the best, with more than half (54.7%) surviving four years and more than one-third (40.0%) still active after 10 years in business.

Even within the same industry, a firm's survival possibility can vary by location. For example, 100.0% of firms in utilities survived one year in business in the northwest region, but only about half (54.5%) survived one year in the central region (see Table 6). On the other hand, firms in agriculture, construction, real estate & rental & leasing, and professional & technical services had the highest one-year survival rates in the central region compared with all other regions. Some industries had very similar one-year survival rates in all five regions of the state; the survival rates for health care & social assistance across the state ranged from 82.8% to 83.8%.

Research shows that there is no relation between higher formation rates and lower survival rates. For example, educational services and administrative & waste services both had higher formation rates than construction for most years from 2000 to 2011, but those industries also had higher survival rates than construction.

In general, firms that opened during or one year prior to an economic downturn were less likely to survive than those opening in all other years (see Figure 6). This should not be a surprise, since these businesses were faced with a tough market for their products and services from the beginning of their formation. New firms that opened in 2008 had a lower one-year survival rate (66.3%) than businesses that opened at any other point over the last 13 years. This is because Wyoming's economy began to decline at the end of 2008, and then experienced the worst contraction in the last 13 years in 2009. During 2009, Wyoming's annual average employment declined by 4.0%.

In contrast, firms that were created before or during a period of economic expansion are most likely to survive. For example, firms that started in 2005 had the highest one-year survival rate (73.1%). Wyoming's average annual employment increased 4.2% in 2006 and 4.1% in 2007, which may have given these new firms a better chance to stabilize their operation.

New business formation in Wyoming began to recover in 2010 and 2011 from the 2009 low point, which was preceded by the national Great Recession (2007Q4 to 2009Q2). However, the recovery occurred at a much slower rate than the recovery from the previous national recession (2001Q1 to 2001Q4). While construction has always been the leading industry in terms of new business formation in Wyoming, that industry has experienced a substantial continued decline over the last four years. In 2011, the number of new construction firms was approximately one-half of its peak level in 2007, and was also the lowest in the last 13 years. This type of substantial decline in construction has never occurred before.

New firms are always signs of hope and encouragement for Wyoming's economy. They create jobs and wages and may replace older, less efficient firms. New business formation in mining, professional & technical services, other services, and accommodation & food services all showed some signs of recovery over the last two years.

Alden, W. (2011, May 25). Small businesses still having trouble getting loans. Huffington Post. Retrieved October 26, 2012 from http://www.huffingtonpost.com/2011/02/09/small-business-loans_n_820675.html

National Bureau of Economic Research. (n.d.) U.S. Business Cycle Expansions and Contractions. Retrieved October 26, 2012, from http://www.nber.org/cycles/cyclesmain.html

National Bureau of Economic Research (2010). Business Cycle Dating Committee. Retrieved October 18, 2010, from http://www.nber.org/cycles/sept2010.html

Wen, S. (2010, November). Recent developments in Wyoming new business formation. Wyoming Labor Force Trends, 47(11). Retrieved October 4, 2012, from http://doe.state.wy.us/LMI/1110/a4.htm

Wiseman, P. (2012, August 15). Economic recovery is weakest since World War II. Real Clear Politics. Retrieved November 16, 2012, from http://www.realclearpolitics.com/articles/2012/08/15/
economic_recovery_is_weakest_since_world_war_ii_115124.html

Last modified by Phil Ellsworth.