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Large companies’ bankruptcies ‘riding rapidly’ to second-largest number in 14 years

Large companies' bankruptcies 'riding rapidly' to second-largest number in 14 years
Vinicius Barbosa

The United States is experiencing a significant surge in bankruptcies among large companies. Through May of this year, 275 large firms have declared bankruptcy, marking the second-highest count since 2010.

This alarming trend indicates the emergence of economic weakness and feeds the rising fears of a recession. In particular, consumer discretionary companies are being hit the hardest as Americans scale back their spending, reported The Kobeissi Letter.

2023 saw the highest number of bankruptcy registrations over the last 14 years, with 277 companies going bankrupt through May. In May 2024 alone, 62 firms filed for bankruptcy, the third-largest monthly number since 2020. Red Lobster, a notable example, recently filed for bankruptcy, highlighting the challenges faced by businesses in the current economic climate.

Notably, the data reveals a concerning pattern, with bankruptcy filings consistently exceeding 200 per year since 2010, except for 2022. The total number of bankruptcies in 2023 reached a staggering 637, surpassing the figures from previous years. As 2024 progresses, the final tally remains unknown, but the current trajectory suggests a grim outlook for businesses.

US bankruptcy filings by year. Source: S&P Global Market Intelligence

Economic indicators point to potential recession

The US economy is facing several challenges that raise concerns about a potential recession, as reported by Finbold. A Global Market Investor report also flagged other indicators that a recession is coming.

GDP growth slowed to 1.3% in the first quarter of 2024, while the nation has been grappling with 38 months of inflation above 3%. Moreover, the government is running a $2 trillion deficit, and the national debt has reached a record high of $34.6 trillion.

Furthermore, there are indications that the monthly non-farm payrolls for 2023 were likely overstated by 730,000 jobs. This discrepancy raises questions about the accuracy of employment data and the true state of the labor market. As these economic indicators paint a worrisome picture, the possibility of a soft landing for the US economy remains uncertain.

Soft landing remains elusive amid economic challenges

Achieving a soft landing, where rising interest rates and tightening financial conditions do not lead to a recession, has proven challenging for the Federal Reserve. Over the past 43 years, there has only been one instance of a successful soft landing in the United States.

43 years, one soft landing. Source: Bloomberg

The difficulty lies in the lagged effect of rising interest rates on the economy, which can take 8 to 18 months to manifest. Additionally, the central bank’s balance sheet reduction, which withdraws liquidity from the financial system, further tightens financial conditions.

The precise impact of these measures is uncertain, making it challenging for central banks to strike the right balance without causing a recession or disrupting the financial system.

Bankruptcy filings and consumer debt raise concerns

The elevated number of bankruptcy filings in the United States adds to the concerns about the economy’s health. As of November 30, 2023, there have been 591 bankruptcies year-to-date, the highest since 2010, excluding the 2020 pandemic year. This surge in bankruptcies is likely due to the rapid interest rate hikes, which have weighed on poorly managed companies and those that underestimated the Federal Reserve’s commitment to combating inflation.

Consumer debt is another area of concern. US credit card debt has breached $1 trillion for the first time in history, with average annualized interest rates on credit cards reaching more than 21%, the highest since at least the 1990s. Serious delinquencies, particularly among younger age groups, have been rising over the past two years, indicating potential trouble for consumer spending.

The United States economy is facing significant challenges, with a rapid increase in bankruptcies among large companies, tightening lending standards, reduced loan demand, and rising consumer debt. Leading indicators suggest that the economy may be heading towards a recession, and achieving a soft landing appears to be an uphill battle.

As the Federal Reserve maintains elevated interest rates and continues to shrink its balance sheet, the probability of economic disruption increases. Unless the US government intervenes with additional stimulus measures, the likelihood of a recession remains high. Businesses and consumers alike must brace themselves for the potential economic fallout and prepare for a challenging road ahead.

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