The trend of business bankruptcy is increasing rapidly, is the US economy on the brink of recession?

The US economy is facing many challenges. One of them is the rapidly increasing trend of corporate bankruptcies. More worryingly, these struggling companies are quite large in scale.

Xu hướng phá sản doanh nghiệp gia tăng nhanh, kinh tế Mỹ đang sát bờ vực suy thoái?

The US economy is facing many challenges. (Source: WSJ)

High interest rates push businesses to the brink

One after another, giant corporations including SVB Financial, Bed Bath & Beyond, and Yellow have filed for Chapter 11 bankruptcy protection this year, blamed on an environment of high inflation and interest rates, weakening government aid, and ongoing supply chain disruptions. With the race to raise interest rates still ratcheting up, the list of bankruptcies is likely to continue as high interest rates push large companies to the brink.

While bankruptcies reflect hardship, the collapse of large companies carries particularly serious economic risks. They can send chills through financial markets, put tens of thousands of people out of work, or – as in the case of Lehman Brothers in 2008 – fuel speculation of an impending recession.

Indeed, the collapse of trucking company Yellow this summer sent shockwaves across the US economy, from the domestic transportation and real estate markets to Wall Street.

The US economy is still growing as consumers go on shopping sprees and businesses step up hiring. Employers added a surprisingly high 336,000 jobs in September 2023, with hiring widespread across all industries.

But bankruptcy filings have surged, with one estimate saying they tripled in the first half of this year compared with the same period last year, along with growing economic risks.

Households are running out of savings due to the pandemic, banks are restricting lending and bond yields are rising. All of this is holding back growth.

The rise in corporate bankruptcies “is a worrying sign for the (economic) outlook,” said Stephen Brown, deputy director of North America economics at research firm Capital Economics.

The US unemployment rate hit 3.8% last month, up from a half-century low of 3.4% earlier this year. And while overall job growth remains strong, there are signs that it is weaker at large companies than at smaller ones.

Large private companies laid off 83,000 workers in September 2023, according to ADP, which conducts monthly payroll counts. Employment at these large companies was down 150,000 from January.

“Mega bankruptcies,” or those of companies with more than $1 billion in assets, rose to 16 in the first half of this year, exceeding the 2005-2022 half-year average of 11, according to consulting firm Cornerstone Research.

Cornerstone said SVB Financial Group, the parent company of Silicon Valley Bank, was the largest corporate bankruptcy, with nearly $20 billion in assets at the time of filing. SVB’s financial troubles quickly spread, raising fears of a recession and prompting the Federal Reserve to step in to calm markets. SVB’s collapse triggered a slump in bank lending and continues to threaten the economy.

Consumers may notice Bed Bath & Beyond stores closing at local shopping centers after the company filed for bankruptcy and announced plans to close stores across the United States.

Yellow, one of the largest trucking companies in the United States, also filed for bankruptcy this summer. Yellow’s shutdown has wiped out about 30,000 jobs, the largest reduction at a single company since Boeing announced in late 2020 that it would cut about 30,000 workers.

Hopes for a "soft landing" are fragile.

Still, job cuts across the US remain at historically low levels. The trajectory of the labor market is key to determining whether the Fed can lower inflation to its 2% target without triggering a recession, a so-called “soft landing.”

As inflation eases, many economists are hopeful that a “soft landing” scenario may be more likely than it was at the start of the year. However, others are less optimistic.

Steven Blitz, chief economist at GlobalData TS Lombard, said that with more bankruptcies, a weak stock market and rising credit card delinquencies, the US economy could be heading for a recession. However, Blitz said the downturn would still be much less severe than the 2007-2009 recession.

“You won’t see the bankruptcies and balance sheet stress that you saw during that period,” the economist said. The recent surge in bankruptcies does not mean “the economy is going into a vicious cycle.”

Rising bankruptcy filings during expansionary periods sometimes indicate concentrated turmoil in a few industries rather than widespread weakness. That was the case in 2015 and 2016, when falling oil prices led to a wave of oil bankruptcies, but the U.S. economy continued to grow steadily.

Large businesses that borrowed at a time of extremely low interest rates are among the most vulnerable when the economy slows and interest rates rise.

Many companies have survived the past few years by taking advantage of the ultra-low interest rate environment, but many of them are seeing those loans come due and are having trouble refinancing because interest rates are now significantly higher, said Amy Quackenboss, executive director of the American Bankruptcy Institute.

Aircraft leasing company Voyager Aviation Holdings said its bankruptcy filing this summer was partly due to the higher interest rate environment.

Other companies with floating-rate debt are particularly vulnerable to default as borrowing costs rise, said Nick Kraemer, head of analytics at S&P Global Ratings.

Petco is one such company. Moody's downgraded Petco again to junk status over the summer. The pet products retailer borrowed $1.7 billion two years ago at an interest rate of about 3.5%. Now it pays nearly 9%.

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