Month: January 2024

Credit is becoming more accessible across the United States as U.S. Treasury yields, influencing the cost of debt like mortgages and corporate bonds, have retreated from recent highs. This easing of credit conditions is seen as a positive indicator for economic health, potentially averting a long-feared recession. Despite the Federal Reserve not reducing interest rates, investors are anticipating future rate cuts, leading to a decline in Treasury yields.

The reduced demand for additional yield on corporate bonds compared to safe Treasurys is lowering borrowing costs for businesses. This has resulted in a surge in the issuance of investment-grade corporate bonds, reaching near-record levels. Even riskier companies are re-entering the debt market, a positive sign for investors concerned about broader economic issues associated with low-rated businesses.

The shift towards a more favorable environment for borrowers is evident in the decline of secured speculative-grade bonds, indicating increased confidence among businesses. The improvement in debt market activity extends to speculative-grade corporate loans, with companies lowering interest rates on existing loans and a rising volume of loans to raise new capital.

Borrowing conditions have also improved beyond the corporate debt market. Concerns about credit scarcity for small and medium-sized businesses following the Silicon Valley Bank failure have eased, with data showing a decline in banks tightening lending standards. Consumers are increasing their borrowing, particularly in mortgage applications, driven by falling interest rates. Asset-backed securities issuance, backed by various debts like credit cards and auto loans, has experienced a surge.

Despite prolonged concerns about a recession, some analysts suggest that the economy and credit markets may be at the beginning rather than the end of an economic growth cycle.

In the calendar year 2023, commercial Chapter 11 filings saw a significant surge, increasing by 72 percent to reach 6,569, compared to the previous year’s total of 3,819. This data is sourced from Epiq AACER, a provider of U.S. bankruptcy filing information.

Overall commercial filings, inclusive of various chapters, experienced a 19 percent rise, reaching 25,627 from the previous year’s 21,479. Notably, Subchapter V elections within Chapter 11 demonstrated substantial growth in calendar year 2023, with 1,939 filings, representing a 45 percent increase from the 1,334 recorded in 2022.

The broader context of total bankruptcy filings in calendar year 2023 reveals a noteworthy 18 percent increase, totaling 445,186, compared to the 378,390 registered in calendar year 2022. Despite this significant year-over-year rise, the total remains below the pre-pandemic figure of 757,816 recorded in CY2019.

Consumer filing figures for calendar year 2023 show a parallel increase, with a total of 419,559, marking an 18 percent rise from the 356,911 filings in the previous year. Within this category, consumer Chapter 13 bankruptcy filings reached 175,964, reflecting an 18 percent increase over 2022’s total of 149,069. Consumer Chapter 7 filings also rose by 17 percent in CY2023 to 242,936 from 207,188 in the previous year.

While still below pre-pandemic levels, overall bankruptcy filings across categories increased in the face of diminishing pandemic emergency responses, escalating interest rates, and stricter lending standards.  As interest rates remain elevated and global tensions impact supply chains, both businesses and families are turning to bankruptcy as a proven process for a financial fresh start.

In December 2023 alone, total bankruptcy filings reached 34,447, marking a 16 percent increase from the December 2022 total of 29,654. The consumer bankruptcy filing total of 32,390 represented a 16 percent

I anticipate the trend to persist into 2024 due to factors such as the conclusion of pandemic stimulus, rising fund costs, increased interest rates, growing delinquency rates, and historically high levels of household debt.

Here are some clues from how we finished 2023: 

Equipment and Software Investment: The third quarter saw a sluggish performance in Equipment and Software (E&S) investment, with a modest rise of 0.5% (annualized) following a robust 7.0% growth in Q2. The persistently elevated interest rates are anticipated to continue dampening investment throughout 2024, maintaining a relatively weak near-term investment climate.

Momentum Monitor: The latest Momentum Monitor assessment indicates that growth in equipment and software investment is likely to remain restrained across various equipment verticals in the coming two quarters. Despite this, recent improvements in readings for most verticals offer a degree of cautious optimism, suggesting potential for increased investment in the latter half of the year.

Manufacturing: After a lackluster year marked by stagnation in the manufacturing sector, U.S. manufacturers are expected to grapple with similar challenges in 2024. High interest rates continue to impede capital expenditure plans, and while the overall pace of U.S. economic growth is expected to moderate, global demand remains subdued. However, certain key industries, including semiconductors and green energy, may experience a boost from continued federal investments, positively impacting associated equipment verticals.

Small Businesses: Despite benefiting from robust consumer spending in the past two years, Main Street faces increasing pessimism among small business owners regarding near-term sales revenue. Concerns are rising that consumers may be showing signs of reducing spending.

Fed Policy: The Federal Reserve maintained interest rates at 5.25–5.50% in its recent meeting. With a significant decline in inflation over the last six months, if economic growth weakens in late 2023 and early 2024 as anticipated, there may be pressure on Fed officials to initiate rate cuts in the spring, particularly if inflation remains around the 3% mark.

U.S. Economy: The U.S. economy likely avoided a recession in 2023, displaying resilience in the labor market despite higher interest rates. The Federal Reserve’s successful efforts to control inflation without causing widespread job losses have instilled confidence in a “soft landing” scenario. However, caution is advised, as high government expenditures contributed significantly to GDP in 2023 but are expected to have a lesser impact in 2024. Consumer spending may soften amid rising financial stress, and global economic conditions remain fragile. 

While a recession in the first half of 2024 remains a possibility, a soft landing appears to be the most likely scenario.