By law, when a firm's payroll reaches $500 or more in a calendar year the employer is required to register with Unemployment Insurance (UI) in Wyoming and provide coverage for his (or her) employees. From these registrations we can determine how many people set up a new business during a specific time period. The new businesses found in this study include only those who are "entirely new" and "active". In other words, the new expanded branches of existing firms such as the new national chain stores in different locations, were not included in our study. Inactive new businesses (those which registered with UI but subsequently reported zero employment and wages for some reason), also were not included.
Wyoming had an overall 12 percent annual growth rate among new businesses between the fourth quarter of 1992 and the third quarter of 1994, and this growth rate appeared to be associated with interest rate changes. During this two-year period a total of 3,078 new businesses started up in Wyoming.
This article will provide details to answer the following questions: How did the growth rates among new businesses vary by industry and region? What economic factors were associated with the growth of new businesses? Which industries predominated among new firms? Which region and county had the most development in terms of the number of new firms? What characteristics did the new firms have? And what survival rate did these firms have after one year in business?
The number of new businesses starting up varied by season. In general, new business start-ups peaked during the second and third quarters. Graph 1 shows the quarterly history of new firm start-ups (3,078). On average, from the first quarter of 1993 until the second quarter of 1994, new business growth increased each quarter compared to the same quarter a year earlier. The growth rates for fourth quarter 1993, first quarter 1994 and second quarters 1994 were 42.8, 17 and 18 percent, respectively, compared to the same quarter a year earlier. These growth rates for Wyoming firms were consistent with the direction of national economic growth. However, in the third quarter of 1994, the number of new firms dropped to 372 (from 441 in the third quarter of 1993), a decrease of 15.6 percent. This downturn was coincidental with and may have been a function of interest rate changes. By the end of the third quarter 1994, the Federal Reserve Board had increased its short-term interest rates for the fifth time in the year. It appears that firms sensitive to interest rates may have been negatively affected by the Federal Reserve's actions.
Each industry has its own seasonality and trend in terms of the development of new firms. For example: in the Services industry, the second quarter of each year appears to be the time that most employers start their businesses. On the other hand, most new firms in the Retail Trade industry start their businesses in third quarter, the quarter before the Christmas purchasing season. Obviously, while there are exceptions, proprietors plan their new business ventures around seasonal demand for the products and services in which they specialize.
Most industries showed downturn in new business development in the third quarter of 1994. The Federal Reserve had raised interest rates for the fifth time and sensitivity to the interest rate changes varied across industries. Construction and Retail Trade appear to have been the most sensitive industries, as they had the biggest declines (21% and 23%) in new firm start-ups compared to the same quarter of the previous year. In conclusion, the growth rate of new business start-ups appears to have been a function of both national economic trends and interest rate changes.
Characteristics of the new firms Services, Construction and Retail Trade were the three fastest growing industries in Wyoming during the past two years.
Both Graph 2 and Table 1 illustrate how the 3,078 new firms were distributed by major industry. More than one third (34.1%) of them, 1049 firms, were in the Services industry. The development of new Services industry firms is consistent with employment growth in the past two years. The second major developing industry was Construction, which had a total of 641 new start-up firms (20.8%). This contrasts sharply with Construction's overall level of employment at six percent. The Retail Trade industry was the third fastest growing industry, with a total of 545 new firms (17.7%) developing during the same period. In Table 2, we can see a consistent pattern from region to region where Services, Construction and Retail Trade were the three fastest growing industries.
As we can see in Table 1, 90 percent (2,769 of 3,078) of new firms started with five or fewer employees. All industries except Public Administration had 80 percent or more of the new start-ups falling into this small operation category. Wholesale Trade had the highest percentage of small business start-ups, almost every one (97.6%) started their businesses at this small scale. Retail Trade seems to be the only industry that had more new firms in the form of larger operations. There were only ten firms with more than 50 initial employees, and six of these firms were in the Retail Trade industry.
By examining the distribution of new firms by region (refer to Graph 3, and to Table 2), we see that the Southwest was the fastest growing region, with a quarter (768 firms) of the new firms in the state. The Northeast had the least development with only 485 new firms opening during the same time period. The rest of the three regions (Northwest, Southeast, and Central) shared a similar development pace (545 to 660 new firms opened in each region).
However, at the county level, there was a significant difference. Natrona County had the single largest share of all new firms, with a total of 409 new firms (13.3% of the state total). Niobrara and Weston had the least development with only 21 and 22 new firms (0.7% of state total) during the last two years. Following Natrona County, Laramie and Teton were the next fastest growing counties. Laramie County had a total of 378 new firms opening and Teton had 315 new firms.
In addition, each industry's new firms were distributed quite differently among regions and counties. For example: the most growth in the Agriculture, Forestry, & Fishing industry occurred in Sheridan County, where 11 new firms (12% of industry total) opened. The Mining industry had 21.4 percent of its new firms located in Campbell County, and Manufacturing had 12 firms (16% of industry total) opening in Natrona County.
Before beginning a new business, one of the most important pieces of information that people should know is the survival rate of a particular industry in a specific geographic area. Only 1,452 of the new firms in our database had more than one year of business experience and this part of our research is based on those firms' experience.
After one year in business, more than one third of these 1,452 firms (461 firms) experienced business growth and hired more employees compared to a year earlier (see Table 3). There were 345 new firms (23.8%) that showed no employment changes, and 127 firms (8.7%) stayed active but lost employees. All three groups, a total of 933 businesses (64.3% of all new firms), are considered survivals. However, there were 519 firms (35.7%) whose operation status was uncertain. They could be out of business or could still be actively involved in business, but they did not report tax information to Unemployment Insurance for some reason.
The industries with the largest percentages of growth (in terms of hiring more employees) were Manufacturing (42.9%) and Retail Trade (40.9%). Public Administration and Wholesale Trade had the highest percentages of firms with stable employment. However, about half of the new Construction firms were classified as "uncertain" status after one year in business.
As a whole, survival rates among the five regions in Wyoming (refer to Graph 4) were quite similar (63.9% to 66.6%). However, if we examine each individual industry, we can see that there was considerable variability in survival rates in different regions. Graph 4 shows the survival rate of new firms for each major industry by region. Agriculture, Forestry, & Fishing had the highest survival rate, 100 percent, in the Central Region, an 88.9 percent survival rate in Southeast Region , and only a 63.l percent in the Southwest Region. New firms in Mining had a 75 percent survival rate in the Southeast Region and only a 62.5 percent survival rate in the Northeast Region. New firms in Manufacturing survived 100 percent in the Northeast Region, 80 percent in the Central Region, but only 33.3 percent in both Southwest and Southeast Regions. The survival rate of new firms in different regions for the same industry could be directly affected by factors like supply and demand for the product or service provided by this industry in the specific area, the level of competition, or the overall economic situation.
Wyoming had a 12 percent annual growth rate among new businesses during the two-year period from the fourth quarter of 1992 to the third quarter of 1994. This growth rate appeared to be a function of interest rate changes. Services, Construction and Retail Trade were the three industries that predominated among new Wyoming firms in the past two years. Natrona, Laramie and Teton Counties had the three largest shares of the new firms, 13.3, 12.3 and 10.2 percent, respectively, of the state total. Each industry had different survival rates among the five regions in the state due to the supply and demand situation of the industry's product, the competition level of the industry, or the overall economic situation in each region.
Xiaohong (Sherry) Yu is a Senior Economist specializing in UI Trust Fund projections in Research & Planning.
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