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What Pace of Start-Ups Says About Health of US Economy

After slowing at the end of the second quarter, the rate of new businesses being launched in the US picked up dramatically in the third quarter and could match a level not seen since 2005.

For a real-world gauge of where the US economy is headed, ask yourself this question: When are people most likely to launch new business ventures?

In most cases, the answer will be: When times are good. New business formations often reflect confidence in the stability and positive outlook for economic growth. Because many new businesses rely on loans to get started, the fact that more are launching can signal lenders’ level of comfort with borrower risks and confidence in the general direction of the economy.

Business start-ups can reinforce certain key trends in economic growth. For example, the rise in start-ups bodes well for the jobs market because private businesses account for the bulk of hiring demand. Tighter labor markets usually translate into more secure consumers, who are more likely to spend. Because consumer spending is the biggest pillar of the US economy, businesses, established and new, are then more inclined to invest in longer-term growth, translating into big-ticket capital expenditure that can further add to momentum.

US business formations accelerated in August, pushing the Morgan Stanley Business Formations Tracker up 2.6% month-on-month to a new high. The pick-up in new business formations follows a modest slowdown late in the second quarter into early third quarter of this year.

Morgan Stanley Business Formations Tracker (MSBIZ*)

*MSBIZ combines Bureau of Labor Statistics business-formation data, which have a time lag, with our proprietary AlphaWise Macro observations of business formation in the most recent three quarters, based on utility connects, government filings, and business registries, to create a consistent, up-to-date time series tracking new business entries.
Source: Morgan Stanley Research

Incorporating August primary data, our model projects 229,000 new private-establishment entries for the third-quarter, 2015, compared with 218,000 in the fourth quarter, 2014.

Private Establishment Births, 3Q15 Estimate: 229K, up 5.2% from 4Q14

Source: Bureau of Labor Statictics, Morgan Stanley Research

Since 2005, the two-quarter growth rate of our AlphaWise Macro business formations has exhibited a 49% correlation with the subsequent two-quarter growth of core capital expenditure orders. In short: Business entry can indicate business investment intentions.

GDP-Weighted Business Formations vs. Core Capital Expenditure Orders (not adjusted for lead time)

Source: Census Bureau, Morgan Stanley Research

For more Morgan Stanley Research on the state of the US economy and where it may be headed, ask your Morgan Stanley representative or a Financial Advisor for the full report, “US Economics & AlphaWise Macro: Business Formations On the Rise” (Sep 10, 2015). Plus, more of our latest ideas.

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