GDP Up, So Are Bankruptcy Filings

Treasury Secretary and former Federal Reserve Chairman Janet Yellen told a gathering at Bloomberg’s Washington office that the U.S. economy is hunky dory. The third quarter’s increase in GDP at a 4.9% annualized rate means, “It’s a good, strong number and it shows an economy that’s doing very well,” Yellen said.

“We have what looks like a soft landing, with very good outcomes for the US economy,” she said. “The economy is continuing to show tremendous robustness and that suggests that interest rates are likely to stay higher for longer.”

Ms. Yellen evidently hasn’t been hanging around bankruptcy court. Almost Daily Grant’s reports “175 domestic firms with at least $50 million in assets filed for bankruptcy this year through Oct. 21 by Bloomberg’s count, up 63% from the average for that period going back to 2000, helping push the 12-month default rate for speculative grade corporate debt to 4.9% according to Moody’s. That compares to 1% at the start of 2022.” 

Higher for longer interest rates will result in more and more defaults and bankruptcies, no matter how good the monetary mavens say the economy is. 

Considering the entire bankruptcy universe, USCourts.gov reports, “Total bankruptcy filings rose 13 percent, and business bankruptcies rose nearly 30 percent, in the twelve-month period ending Sept. 30, 2023. This continues a moderate rebound after more than a decade of sharply dropping totals.”  

For more than a decade interest rates were falling and zombie companies roamed the economy with the benefit of low interest payments. Free money from the government during COVID also provided a shot in the arm for the financially infirm. 

“This is the third straight quarter that total bankruptcy filings have risen, following a decade-plus decline. Bankruptcies fell especially sharply after the pandemic began in early 2020, despite some COVID-related disruptions to the economy.”

Finally, the explosion of interest rates has exposed the financially weak and the various chapters of bankruptcy await. 

Despite this year’s increase, total BK filings are but a quarter of the nearly 1.6 million filings for the 12 months ended September 2010.