January 25, 2023
How was growth in the final months of 2022? We find out tomorrow morning, with fourth-quarter GDP numbers due out at 8:30am ET. Analysts expect a 2.6% annual growth rate; we'll be all over it in tomorrow's edition.
- But today, we look at evidence that a pandemic surge in entrepreneurship is still going strong, and explore how a potential White House job for the Federal Reserve's No. 2 official would affect the central bank.
Today's newsletter, edited by Javier E. David, is 663 words, a 2.5-minute read.
1 big thing: The economy's lasting start-up boom
In the early years of the pandemic, Americans filed a historic number of applications to start new businesses — importantly, ones that were likely to employ other people.
- New data shows that explosion of entrepreneurial activity continued last year, even as inflation and recession fears soared.
By the numbers: There were 1.7 million applications for new businesses that were likely to hire employees in 2022, according to the Economic Innovation Group, a bipartisan organization that analyzed data from the U.S. Census.
- That's down slightly from 2021's all-time record of 1.8 million, but still well above pre-pandemic norms. Last year's applications are up nearly 28% from before the pandemic.
Why it matters: The lasting surge in applications could be a leading indicator of greater economic dynamism — more jobs, innovation and productivity advancements — all of which drive long-term growth.
- What they're saying: "The steadiness in application levels exhibited over the course of 2022 offers optimism that the pandemic may have delivered a lasting, positive shock to American entrepreneurship," EIG's Daniel Newman and Kenan Fikri wrote.
The intrigue: Across most sectors, there are more applications for new firms, which are likely to employ more workers.
- That includes industries that experienced boom times as consumers shifted their behavior, including transportation and warehousing; new business applications there are a whopping 51% above 2019 levels.
- Just four sectors (out of 19 tracked by the Census Bureau) saw business applications last year at or below pre-pandemic levels, including agriculture and education.
In every single state, the number of these filings trumped pre-pandemic levels.
- Regionally, the South is experiencing the biggest start-up boom relative to 2019, while the smallest increase since 2019 was seen in the Northeast.
The bottom line: The pandemic stirred up more American entrepreneurial ambitions than any other period on record. Incoming data will offer more clues about how many of these applications transform into full-fledged hiring businesses.
- But looming threats of inflation and recession did not appear to dampen start-up hopes.
What to watch: "As the Federal Reserve continues tightening monetary policy and the probability of a recession rises, many of these new businesses — a significant chunk of which were likely founded by first-time entrepreneurs — may not survive," the researchers write.
2. What a Brainard exit would mean for the Fed
Lael Brainard, the No. 2 official at the Fed, is a leading contender to become President Biden's top economic adviser, the Washington Post first reported this morning. It raises an important question: If she heads to the White House, what would it mean for the central bank?
- One answer is that it would make her the odds-on favorite to be the next Fed chair, if Biden is re-elected. But that was already the case. There would be a more immediate impact on the Fed if she departs for 1600 Pennsylvania Avenue.
Between the lines: Brainard plays a thoughtful and active role in the monetary policy debates we spend a lot of time discussing here. But presumably, a new Biden appointee to the vice chair job would share her mainstream to somewhat dovish policy views.
- Brainard's bigger imprint is running hugely important, but usually beneath the radar, aspects of the Fed's operations.
- The Board of Governors divides itself into eight committees to parcel out various aspects of its work, and Brainard is the chair of four of them.
Brainard leads the committees on "Board Affairs," overseeing the agency's operations, and "Economic and Monetary Affairs," which encompasses the Fed's massive research staff.
- She also leads "Financial Stability," aimed at sussing out hidden risks in the system, and "Payments, Clearing, and Settlement," the Fed's work enabling trillions in transactions between banks each year.
- It's not an exaggeration to say that while Jerome Powell chairs the Fed, Brainard runs the place, in the sense of overseeing a vast swath of the central bank's actual on-the-ground operations.
What's next: If Brainard departs, Powell will need to decide how to parcel out those responsibilities among remaining governors Michael Barr, Michelle Bowman, Lisa Cook, Philip Jefferson, and Christopher Waller.