Startup Activity at Record Low: Challenger

The share of U.S. job-seekers starting their own businesses dropped in the first half of 2010 to the lowest two-quarter rate on record, according to data from the outplacement firm Challenger, Gray & Christmas released July 19.

Challenger, which provides training and counseling to job seekers, says just 3.7 percent of job seekers leaving its outplacement program are going into business for themselves in the first half of 2010, compared to an average of 8.6 percent in the full-year 2009. The data is based on a quarterly survey of 3,000 people, including 75 percent to 80 percent former managers or executives, Challenger spokesman James Pedderson says in an email.

Scarce financing and improving job prospects are steering more of these workers away from entrepreneurship, says Daniel Cohen, a lecturer at Cornell University’s ILR School. “Whether you’re starting a small business or you want to make a more scalable business and raise venture funding, either way the capital is harder to come by,” Cohen says.

The unemployment rate, at 9.7 percent, remains high, but job losses have abated and some companies resumed hiring in 2010. The private sector added 593,000 jobs in the first half of 2010, compared to a loss of 968,000 in the last half of 2009, according to seasonally adjusted data from the Bureau of Labor Statistics. “For those that were thinking of doing a startup as a last resort…there’s more opportunity now,” Cohen says.

Startup activity tends to drop at the beginning of a recession, spike at the end when unemployment is highest, and drop when hiring resumes, Challenger CEO John Challenger says in a statement. (See chart below.) “Right now, we are in the early stages of recovery when the fundamentals of the economy are still pretty shaky, but employers are just starting to add workers back to their payrolls,” he says. Startup activity increases again as the economy improves, he said.

The Challenger survey, which began in 1986, showed the highest rate of startups over two quarters in the first half of 1989, when the unemployment rate was under 5.5 percent. At that time, 21.5 percent of Challenger’s exiting job-seekers opted to start businesses, the group says.

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