Wall Street is currently experiencing an unprecedented surge in corporate bankruptcies, surpassing levels seen over the past 13 years, according to a report by S&P Global Intelligence.
This surge has alarmed investors and analysts alike, as the number of filings in June alone reached the highest monthly level since the pandemic-induced chaos of 2020. With 75 bankruptcies reported last month, the total for the year now stands at 346.
While individual company struggles often contribute to business closures, S&P Global has identified several broader economic factors exacerbating the situation. High interest rates, persistent supply chain issues, and a slowdown in consumer spending are the primary drivers behind the spike in bankruptcies.
Earlier this year, there was optimism that interest rates would soon be reduced significantly, which helped keep bankruptcy rates relatively subdued. However, this hope faded as it became apparent that the Federal Reserve’s monetary policy would remain stringent for an extended period. The spike in bankruptcies began in April, coinciding with the realization that high-interest rates were here to stay.
The Federal Reserve has maintained interest rates at a high level of 5.25%-5.50% for nearly a year now, drawing criticism from some economists who argue that this policy risks causing unnecessary economic damage. Mark Zandi, chief economist at Moody’s, expressed his concerns to CNBC, stating, “If I were on the Fed, I would have argued for rate cuts at the end of last year. I think they’re taking an increasing risk of putting too much pressure on the economy, financial system and ultimately, potentially breaking something.”
Despite the current economic challenges, there is renewed optimism for an upcoming rate cut, fueled by recent moderation in both labor and inflation data. While the Federal Reserve has emphasized the need for more evidence of disinflation, Zandi predicts a rate cut could occur as early as September.
Another significant factor contributing to the rise in bankruptcies is the deterioration in consumer spending. During the pandemic, stimulus measures spurred a surge in retail spending, which extended into 2023. However, this trend has since reversed, with retail sales volumes declining by 1.3% year-over-year in the three months leading up to June. This slowdown in consumer spending is impacting corporate earnings and forcing companies to make difficult decisions.
Retailers, in particular, are feeling the pinch. For instance, Nike has announced plans to reallocate $1 billion towards “consumer-facing” initiatives in an effort to adapt to changing market conditions. Similarly, Walgreens is set to close over 2,000 underperforming locations as part of its restructuring efforts.
June saw several high-profile bankruptcies, including electric vehicle maker Fisker and Redbox DVD rental operator Chicken Soup for the Soul Entertainment. The consumer discretionary sector has been hit hardest, leading with 55 bankruptcies this year. This sector is followed by healthcare and industrials, according to S&P Global.
The rise in bankruptcies is not only a concern for the affected companies and their employees but also for the broader economy. High-interest rates are making it more expensive for businesses to borrow money, which in turn hampers their ability to invest and grow. Supply chain disruptions continue to pose significant challenges, leading to increased costs and operational inefficiencies. Additionally, the decline in consumer spending is reducing demand for goods and services, further straining corporate finances.
As the Federal Reserve deliberates its next move, the economic landscape remains precarious. The potential for a rate cut offers a glimmer of hope, but the central bank’s actions will need to be carefully calibrated to avoid further exacerbating the situation. For now, businesses must navigate a complex and challenging environment, balancing the need to manage costs with the imperative to invest in their future growth.
The surge in corporate bankruptcies serves as a stark reminder of the interconnected nature of economic factors and the challenges that businesses face in a rapidly changing landscape. As Wall Street grapples with these realities, the focus will remain on finding ways to adapt and thrive amidst the uncertainties.
