The variety of U.S. firms filing for bankruptcy last month surpassed the height seen early within the pandemic in 2020, when the economy was still affected by lockdowns.
A Monday’s report from S&P Global Market Intelligence said 75 bankruptcy filings were made in June, up from 62 in May and up from a peak of 74 in July 2020 throughout the pandemic. The year-to-date total of 356 bankruptcy filings also surpasses the identical period in 2020 and is higher than any comparable number previously 13 years.
“High interest rates, supply chain problems and falling consumer spending continue to weigh on struggling companies,” S&P Global said.
This is because 2023 was already the worst 12 months for corporate bankruptcies because the Great Financial Crisis and 2024 is predicted to exceed the previous 12 months’s total.
This is one other sign of the impact the US Federal Reserve’s aggressive rate of interest hike campaign is having on the economy. And even Federal Reserve Chairman Jerome Powell noted that there are increasing signs of a slowdown within the labor market.
Notable firms which have entered bankruptcy proceedings include electric vehicle maker Fisker, which filed for bankruptcy on June 17. S&P noted that Fisker executives said in February that sales in 2023 can be hurt by delivery delays, rising rates of interest and a shortage of expert staff.
Chicken Soup for the Soul Entertainment, the owner of Redbox DVD kiosks, also filed for bankruptcy last month. On June 28, the corporate initially filed for Chapter 11 bankruptcy, which allowed it to proceed operating while it worked on a plan to repay its creditors. But every week later, the corporate moved to Chapter 7, which suggests it is going to close its operations and liquidate.
Meanwhile, 1000’s of other firms are struggling to remain afloat. An Associated Press evaluation last month found that the variety of publicly traded “zombie” firms has risen to almost 7,000 worldwide, including 2,000 within the United States alone. The firms had amassed low cost debt and were then hit by a surge in borrowing costs when rates of interest were raised to combat high inflation.
The surge in bankruptcy filings comes at a time when an increasing number of people on Wall Street are sounding the alarm in regards to the economic situation.
In a note last week, Citi Research pointed to the Institute for Supply Management’s services indicator, which suddenly slipped into negative territory, and the monthly labor market report, which showed unemployment rising to 4.1%.
This has increased the chance that the economy is heading for a deeper downturn, and Citi forecasts that the Fed will cut rates of interest by 25 basis points eight times between September and July 2025.
Citi also highlighted the Sahm Rule recession indicator, saying it could possibly be triggered in August if unemployment continues to rise at the present pace.
The creator of this rule, Claudia Sahm, was an economist on the Federal Reserve and is now chief economist at New Century Advisors. Last month she told CNBC that the Fed’s continued hesitation in lowering rates of interest risks an economic recession.
“My baseline is not a recession,” Sahm said. “But it is a real risk, and I don’t understand why the Fed is pushing that risk. I’m not sure what they’re waiting for.”
