*5.2. New Business Survival Rate 2005*

We found that WSE-Risk had a consistent impact on the survival of new businesses in 2005. These businesses were born in 2000–2001. The analysis was conducted over different timeframes.

WSE-Growth and WSE-Growth Squared were not found to have any impact. However, WSE-Risk was consistently found to be positive and have a significant impact on business survival in MSAs in 2005. The impact of WSE-Risk was found to be robust across all selected timeframes. Again, we offer the following speculative scenarios to help understand these results.

The distinctive event in the lives of new businesses was the 2001 recession. This recession was unique compared to the recessions preceding it as it lasted for eight months, which is less than the average age of eleven months of previous recessions [42], and largely saw a technology, telecommunications, and tourism downturn. Comparatively, it was a milder and shorter recession. The unemployment rate increased by 2.10 percentage points, non-farm employment declined by 1.34 percentage points, while real output dropped by 1.6% from first quarter to the second quarter of 2001 [42]. Despite the decline in output and increase in unemployment, the 2001 recession was also unique because, surprisingly, the U.S. economy observed increased spending on consumer durables, new residential housing, and a significant increase of 2.2% in labor productivity. The latter is broadly attributed to the increased spending on information technology and computer hardware by corporations to combat the threat of Y2K in the late 1990s. The causes of this recession are the dot-com bubble burst, the decline in international trade, and the terrorist attacks of 11 September, all of which resulted in a decline in business spending and eventually the gross output. The 2001 recession severely affected the Technology sector compared to other sectors of the economy.

"Median Household Value, 2000" was found to have a positive and significant impact on new business survival in 2005 during the selected timeframes. An increase in median household value in MSAs is likely to affect business survival through dual channels. Ref. [42] found that expenditure on new housing and consumer durables grew in the years before the 2001 recession and continued to grow throughout the recession. The long-term interest rates peaked ten months before the March 2001 business cycle peak and continued to decline subsequently. Low-interest rate regimes before and during the 2001 recession fueled the growth in the housing market, which resulted in a boom in this sector in subsequent years. Many cities across the country witnessed unprecedented growth in housing prices. Ref. [43] estimated the price elasticities of housing stock at the MSA level, and found that in areas with high elasticity of housing supplies, the number of new houses increased, and areas with low elasticity saw sharp increases in housing prices. With increased home prices, existing homeowners cashed out their dormant home equity. A significant portion of this extra cash was spent on buying consumer durables and bigticket items. This additional spending is likely to have trickled down as increased revenue for many existing and newly born establishments. The cashed-out home equity also became an additional and untapped source of funds for the owners of new establishments to invest in business and support existing operations, as well as to fuel growth.

"Population with High School degree but No BA+" was found to have a negative and significant impact on business survival in 2005. A distinctive feature of the 2001 recession was the sharp rise of 2.2 percentage points in non-farm labor productivity [42]. The late 1990s witnessed a significant investment in computer equipment and software by corporations to combat the threat of Y2K, and also the adoption of new technology, which likely resulted in increased labor productivity. Growth in labor productivity resulted in real disposable income growth (0.37%). The increased investments in IT and computer hardware by corporations may not have improved the productivity and the resulting disposable income of semi-skilled and unskilled labor force. Regions with less skilled labor force are likely to have missed these benefits, which would have affected the survival of businesses there. This impact is likely to have been stronger, especially during the recession.
