U.S. corporate bankruptcies are soaring above the pandemic-era peak, adding to the economic alarm bells piling up
The number of U.S. companies that filed for bankruptcy last month topped the highs seen during the early stages of the pandemic in 2020, when the economy was reeling from lockdowns.
A report Monday from S&P Global Market Intelligence said June saw 75 filings, up from 62 in May and above the pandemic-era peak of 74 in July 2020. The year-to-date total of 356 bankruptcy filings also tops the same period in 2020 and is higher than any comparable figure in the last 13 years.
“High interest rates, supply chain issues and slowing consumer spending continue to weigh on struggling companies,” S&P Global said.
That comes as 2023 was already the worst year for corporate bankruptcies since the Great Financial Crisis, and 2024 is on pace to exceed last year’s total.
It’s another sign of the toll that the Federal Reserve’s aggressive rate-hiking campaign is having on the economy, and even Chairman Jerome Powell has noted the labor market is increasingly showing signs of cooling.
Among the notable companies that entered bankruptcy proceedings is electric vehicle maker Fisker, which filed on June 17. S&P noted that Fisker executives said in February that 2023 sales were hit by supplier delays, rising interest rates, and a shortage of skilled labor.
Another filing last month was Chicken Soup for the Soul Entertainment, the owner of Redbox DVD kiosks. It initially filed for Chapter 11 protection in June 28, allowing it to keep operating while it worked on a plan to repay creditors. But a week later, the company shifted to Chapter 7 bankruptcy, meaning it will shut down and liquidate its business.
Meanwhile, thousands of other companies are barely holding on. An Associated Press analysis last month found the number of publicly traded “zombie” companies has soared to nearly 7,000 worldwide, with 2,000 in the U.S. alone, after accumulating cheap debt then getting slammed by a spike in borrowing costs as rates rose to fight high inflation.
The surge in bankruptcy filings comes as more people on Wall Street are sounding alarms about the economy.
In a note last week, Citi Research pointed to the Institute for Supply Management’s service-sector gauge, which abruptly reversed into negative territory, and the monthly jobs report, which showed unemployment rising to 4.1%.
That has raised the risk that the economy is headed for a sharper slowdown, leading Citi to predict the Fed will trim rates by 25 basis points eight times, starting in September and extending to July 2025.
Citi also highlighted the “Sahm Rule” recession indicator and said it could be triggered in August if unemployment continues to rise at its current pace.
The creator of the rule, Claudia Sahm, was an economist at the Federal Reserve and is now chief economist at New Century Advisors. Last month, she told CNBC that the Fed risks sending the economy into a recession by continuing to hold off on rate cuts.
“My baseline is not recession,” Sahm said. “But it’s a real risk, and I do not understand why the Fed is pushing that risk. I’m not sure what they’re waiting for.”
