The White House has become famous for saying signs of recession are nowhere in sight.
It was a popular administration refrain last year following the announcement that gross domestic product (GDP) had declined from April to June for the second straight quarter. A longstanding “rule-of-thumb” standard of recession is contraction of the economy for two consecutive quarters. As it turned out, GDP fell by 1.6% annualized in Q1, and declined again in Q2 by 0.6%.[1]
As soon as Q2 2022 GDP was announced, the White House went on the “defensive” offensive; despite the unfortunate GDP numbers, they insisted, the nation was not in recession.
“You don’t see any of the signs now,” Treasury Secretary Janet Yellen said at the time. “A recession is a broad-based contraction that affects many sectors of the economy—we just don’t have that.”[2]
To be fair, the National Bureau of Economic Research (NBER), the organization that formally declares whether a recession has ensued, makes that determination using more economic data than just quarterly GDP. So far, they have yet to say that we were in recession at any point in 2022. But the idea that neither Secretary Yellen nor any other member of the Biden administration didn’t see two straight quarters of negative GDP as even a sign of possible recession seems curious.
Fast forward to 2023. In the wake of an initial round of banking-system turbulence in March, Federal Reserve economists said they did expect that turmoil to push the economy into a formal, NBER-style recession later this year.
The White House again wasn’t hearing any of it. Press secretary Karine Jean-Pierre responded sharply to the Fed forecast, saying that “recent economic indicators are not consistent with a recession or even a pre-recession.”[3]
OK. But one week later, the Bureau of Economic Analysis reported that annualized GDP in the first quarter came in at an anemic 1.1%…a big drop from the 2.6% posted in the previous quarter and significantly below economists’ projection of 2%.[4]
Also a week later, The Conference Board reported that its highly valued Leading Economic Index (LEI) fell in March for the 12th straight month, and down to its lowest level since November 2020.[5]
To clarify, the LEI is no superficial measure; the index is calculated using 10 different component metrics that gauge trends in the labor market, housing market, manufacturing, money supply and other key areas of the economy.
Oh, and the April LEI? The Conference Board just reported that came in at negative 0.6% – which means it now has declined for the 13th straight month.[6]
But neither a rapidly sinking GDP nor a continually sinking Conference Board LEI – nor even the two, together – is a sign of even possible recession, apparently.
What if we add something else to the mix…such as a whole lot of bankruptcies?
You haven’t heard about those?
There’s a big surge in bankruptcies right now. Just this past weekend, at least seven large companies – including Vice Media, once valued at $6 billion – filed for Chapter 11 protection.[7] According to Bloomberg, it’s the largest number of filings over a 48-hour period since at least 2008.[8]
But the bankruptcy trend is a lot more than just what happened last weekend. The overall pace of bankruptcies so far in 2023 is stunning. And it’s expected to continue.
Chances are good the White House doesn’t see the ongoing bankruptcy surge as a harbinger of recession, either. To my knowledge, they haven’t said anything about it. But it’s become a trend that’s difficult to miss – and one with potentially sizable implications for the labor market and the economy, at large.
Perhaps you’re inclined to dismiss the corporate bankruptcy wave as relatively inconsequential in the way the administration seems to be doing the same. But before you do, it might be a good idea to see just what’s going on.
Let’s do that now.
According to the most recent data from S&P Global, corporate bankruptcies are occurring at what can be described fairly as an extraordinary pace in 2023 so far.
As of the end of April, there have already been 236 bankruptcies this year. For perspective, by the end of April last year, 109 bankruptcies had been recorded. That means – through the first four months of 2023 – there’s been a 216% increase in corporate bankruptcies this year over last.[9]
Separately, UBS bank recently determined that bankruptcies of companies worth $10 million or more had been occurring at a rolling-average pace of 7.8 per week. What makes that so disconcerting is that it’s much higher than what we saw during COVID lockdowns: just 4.5 per week (as of June 2020), according to UBS.[10]
Matthew Mish, head of credit strategy at UBS, commented on the figure in a research note, saying, “We believe one of the more underappreciated signs of distress in US corporate credit is already emanating from the Small and Mid-size Enterprises sector.” Mish added that it’s the “smallest of firms facing the most severe pressure from rising rates, persistent inflation and slowing growth.”[11]
To be clear, financial institutions had been tightening corporate lending standards even before the onset of recent bank failures.[12] Large banks approved just slightly more than 14% of small-business loan applications in February – nearly half the rate of approval that was typical before the pandemic. Smaller banks approved 20% of their loan applications in February, but that’s a big drop from the roughly 50% approval rate that was standard right before the pandemic.[13]
However, conditions are even tighter now since the wave of bank collapses, as economist Peter St. Onge noted recently.
“Banks are battening down the hatches, hogging their bailout money instead of lending it out,” St. Onge said. “That credit crunch means not only do we get bankruptcies like in any recession, on top of that we get a lending wall that cuts off even the healthy businesses. Of course their jobs go down with them.”[14]
And the impact this furious rate of corporate bankruptcies could eventually have on the labor market is substantial. According to Pantheon Macroeconomics, nearly 60% of the total private-sector workforce is employed at companies with staff of 500 or fewer.[15]
Several weeks ago, UBS’s Matthew Mish expressed relief that the surge in bankruptcy filings by nonpublic companies “does not appear to have spilled over to the US labor market.”[16]
But the labor market’s luck isn’t guaranteed to hold out. Although the government’s official unemployment rate is currently at its lowest level in more than a half-century, signs of weakness in the jobs market are beginning to emerge.
Layoff Announcements Are Soaring
According to the executive outplacement firm Challenger, Gray & Christmas, the first four months of this year have seen employers announce 337,411 job cuts. That’s a 322% increase over the 79,982 job cuts announced in the first four months of 2022. If you exclude 2020, which was largely characterized by unusually severe economic fallout due to widespread pandemic-triggered lockdowns, this year’s January-through-April layoff announcements are the highest since 2009, the midst of the global financial crisis.[17]
For its part, the Federal Reserve expects the labor-market picture to worsen in relatively short order. Right now, the official jobless rate is 3.4%. But the Fed projects it will jump to 4.5% by the end of the year and, by December 2024, reach 4.6%.[18] If that comes to pass, it would represent a 35% increase over the present level and “translate” to job losses in excess of one million.[19]
And there are those who think the unemployment rate will go even higher.
Let’s say a little more about that as we close out this week’s article.
The bankruptcy trend that’s been in full effect since the beginning of the year may have a long run ahead of it. Moody’s expects that defaults by companies with speculative-grade debt will continue to grow and reach nearly 5% by the end of Q1 2024 – a 70% increase over the 2.9% default rate that prevailed at the end of this year’s first quarter.[20]
It’s reasonable to consider that the fallout from these bankruptcies could intensify the recession so many have been forecasting. At the outset of this piece, I mentioned the projection of Fed economists that a recession would begin later this year. Plenty of others are saying the same thing.
The Conference Board, for example, has said that recession could begin as soon as next month.[21] Among the Board’s latest economic projections: We’ll see negative GDP for the second, third and fourth quarters of this year as well as an unemployment rate that persists well above 4% for all of 2024.[22]
Fannie Mae economists go a step further in the pessimism of their outlook. They project negative GDP from Q2 2023 through Q1 2024 and an unemployment rate that averages more than 5% for all of next year.[23] At that level, the number of jobs lost could approach 2.5 million.[24]
Despite this, government leaders claim they see no signs of recession on the horizon. They even seem all too happy to take issue with Federal Reserve economists who’ve said we’ll be facing recession sometime this year.
Against a backdrop of tenable recession predictions, both corporate bankruptcies and layoff announcements are beginning to soar. To the Biden administration, these stark trends may not look like trouble on the economic horizon.
………
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