Corporate bankruptcies are increasing, as we noted in “Corporate Bankruptcies Could Reach 13-Year High” (26 Sep 2023). Even more worrying, a larger number of very big businesses are going bust.
The failure of big companies tripled in the first half of this year, compared to the first half of 2022, by one estimate referred to by The Wall Street Journal.
The number of companies worth $1 billion or more that went broke in the first six months of 2023, compared to the average of 11 from 2005 through 2022, according to data service Cornerstone Research.
Last spring saw three rapid-fire bank failures, including the second- and third-largest in U.S. history.
This year, Silicon Valley Bank, Bed Bath & Beyond, freight hauler Yellow, and now the Rite-Aid drugstore chain have sought court protection from debts they were unable to overcome. Yellow’s collapse in August “reverberated across the economy, from domestic shipping and real estate markets to Wall Street,” Wall Street Journal analyst Sarah Cambon wrote in a 9 October commentary.
“More corporate filings are likely on the way as high interest rates push big companies over the edge,” she predicted.
“Companies have been surviving the past few years by taking advantage of ultralow interest rates,” Amy Quackenboss, executive director of the American Bankruptcy Institute, said in a WSJ interview, “Many of these corporations are seeing loans come due. They’re struggling to refinance because interest rates now are significantly higher.”
A wave of failures among large companies “is a worrying sign for the outlook,” economist Stephen Brown at Capital Economics said to the WSJ. “Businesses that go bankrupt still have to cut costs, [and] still have to lay off workers.”
Large privately-owned companies dumped 83,000 workers in September and 150,000 since January, payroll processing service ADP said in its most recent monthly report.
The rising tide of big bankruptcies, a weak stock market, and a growing rate of household credit card delinquencies spells recession to Steven Blitz, GlobalData TS Lombard’s chief U.S. economist. The downturn will be less severe than the Great Recession in 2007 through 2009, he added.
“The recent rise in bankruptcies doesn’t mean the economy is heading into some doom-death loop,” he said.
TRENDPOST: A larger number of corporate bankruptcies may not be a death knell for the U.S. economy, but they can add to factors that can create a downward spiral.
Big corporations that fail lay off thousands of workers. Those workers must slash spending, either in the short term or for a prolonged stretch. Remaining businesses see sales fall, leading to more layoffs and a reduced budget for investment in improvements or expansion.
Spirals like that create their own momentum.
TREND FORECAST: The U.S. Federal Reserve’s 1 November decision on interest rates will be key. A higher rate will add new energy to that spiral. Holding interest rates as is will enable more corporations to look for ways to survive until the central bank begins reducing its rates—an action now expected in mid-2024 or probably sooner if the economy slides into a full-on recession.
But again, the Israel War wildcard now being played is a Joker Wild. Should this war persist and escalate by bringing in Iran vs the U.S. and Israel, it will further ignite World War III which will in turn crash economies and equity markets.
Also, bankruptcies will increase as the Office Building Bust accelerates.