by tyler | May 22, 2023 | CNN, economy
From Vice Media to Bed Bath & Beyond, bankruptcies are picking up again. Last week, corporate America had its worst 48-hour stretch of bankruptcies since at least 2008, according to Bloomberg. That’s never a good comparison.
So far, more than 230 companies have filed for bankruptcy in 2023, according to the latest data from S&P Global, which tallied the figures through April.
James Gellert, CEO of Rapid Ratings International, a company that evaluates the financial health of public and private companies, said many of these troubled companies have similar traits.
“The big themes are that they have degraded in operational quality and have debt that has been unsustainable,” he said.
“That is the formula for bankruptcy in this market.”
Retail companies are some of the hardest hit in the current economic environment because they are susceptible to consumer buying changes, Gellert said. Party City, Tuesday Morning and David’s Bridal are just some of the retailers to have filed for bankruptcy this year.
Companies with weaker balance sheets may continue to feel the pain all the way into next year. The corporate default rate for companies with lower credit quality will peak in early 2024, said Moody’s Investors Service, before falling as economic growth re-accelerates.
“Consumers will find that some brands are either unable to maintain their businesses or are having to change their business models,” Gellert said.
He estimates that consumer-facing companies with strong customer loyalty will fare better than others.
The Federal Reserve’s rate-hiking campaign has played a role in the bankruptcy uptick.
As the Fed hikes rates, companies with less stable finances face the adverse effects of a “credit crunch,” an economic situation in which financial institutions tighten up requirements for obtaining a loan, meaning fewer loans are available. These companies struggle to get loans; if they do, they must pay higher interest rates for that borrowing.
Despite the fact that Fed Chair Jerome Powell has left the door open to potentially pausing after 10 consecutive hikes, the pain is not over for debt-laden companies. Rising rates will have a “lagged impact” on corporate balance sheets, Bespoke Investment Group co-founder Paul Hickey said.
“If you look back to the financial crisis, the market bottomed in March of 2009, and you were still seeing bankruptcies throughout that year, even as the market was doing better,” he said.
“There’s still going to be trouble going forward,” he said.
by tyler | May 18, 2023 | CNN, economy
Chinese President Xi Jinping has opposed the lifting of curbs on street vendors in Beijing, signaling splits within government over a policy shift aimed at tackling rising unemployment.
In a recent tour of the Xiongan New Area, a city south of Beijing, Xi unusually revealed his personal views about the “street stall economy,” according to a report earlier this week by China’s state-owned Xinhua news agency.
“The capital city is first and foremost a political center, not a ‘hodgepodge’, where ‘factories in alleys’ and the ‘street stall economy’ are not allowed,” he said.
It’s the first time the top Chinese leader has spoken out publicly against recent efforts to revive the “street stall economy,” a policy that many cities have touted as a way to reinvigorate small entrepreneurship and create jobs as urban youth unemployment hits record highs.
It’s unclear whether the capital must now comply with Xi’s views and outlaw street vendors once again.
Beijing, a mega city of 22 million people, is one of dozens of major cities including Shenzhen and Shanghai, that have relaxed curbs on street vendors over the past few months after years of sometimes violent campaigns against hawking. City authorities are encouraging people to set up street stalls or carts in certain areas, where they can sell local specialties, snacks, clothes or toys.
The lifting of restrictions came after Zibo, a formerly little known factory town, became a viral sensation for its outdoor barbecue stalls, inspiring other cities to try to copy its success.
When China was in the midst of a pandemic-induced economic slump in 2020, then Premier Li Keqiang touted the idea of creating jobs by encouraging street vendors to set up shop across the country. That pitch was quickly shot down by close associates of Xi, who characterized the traditional trade as “unhygienic and uncivilized.”
Public discussion about street vendors also faded after major cities, including Beijing and Shenzhen, made clear that hawkers were not welcome there.
Analysts said then that street hawking was something Xi did not like, as it was seen to tarnish the image of a successful and modern China. The idea of vendors flooding the streets of metropolises was also at odds with his vision of China as an advanced, high-tech superpower.
But the recent policy reversal was made against a backdrop of growing challenges facing the world’s second largest economy.
The country’s jobless rate for 16- to 24-year-olds hit a record high of 20.4% last month, after three years of pandemic restrictions hit small businesses hard. A regulatory crackdown has also wiped out tens of thousands of jobs in the education and tech industries.
Street vending, according to analysts, is a pragmatic way to tackle pressing issues in the short term, as it allows jobless or under employed people to make a living.
by tyler | May 18, 2023 | CNN, economy
The number of first-time claims for weekly jobless benefits fell last week to 242,000, down 22,000 from 264,000 the week before, according to data published Thursday by the Department of Labor.
Continuing claims, which are filed by people who have received jobless benefits for more than one week, dipped to 1.799 million for the week ended May 6 from a revised 1.807 million the week prior.
Economists were forecasting the latest initial and continuing claims to land at a seasonally adjusted 254,000 and 1.818 million, respectively, according to consensus estimates on Refinitiv.
However, reports of incidents of fraud in Massachusetts have muddied this key piece of economic data in recent weeks.
A week ago, the Department of Labor’s report on unemployment insurance filings showed that the number of weekly initial claims jumped by 22,000 to land at their highest level since October 2021. However, a large share of those new claims came from Massachusetts, where the state labor department said the reported gain was a reflection of an increase in fraudulent activity and not necessarily a spike in people filing for unemployment benefits.
“The Massachusetts Department of Unemployment Assistance is experiencing an uptick in fraudulent attempts to access unemployment insurance benefits,” Matthew Kitsos, a spokesman for the state’s Executive Office of Labor and Workforce Development, said in a statement. “Fraudulent attempts are increasing across the country, and Massachusetts is no exception. The increase seen in initial weekly unemployment claims is not reflective of individuals filing for unemployment insurance but rather fraudulent attempts on the system.”
Thursday’s report appears to counterbalance that and recent increases in Massachusetts. The weekly claims attributed to Massachusetts fell by 14,042 on a non-seasonally adjusted basis, representing three-quarters of the decline of 18,605 claims.
“Apart from Massachusetts, initial claims have stabilized in recent weeks after drifting higher in [the first quarter], a reminder that labor market conditions are still relatively tight,” Nancy Vanden Houten, Oxford Economics lead US economist, wrote Thursday. “While we expect the [Federal Reserve] to leave rates steady at its June meeting, a resumption of rate hikes can’t be ruled out if labor market conditions don’t ease more significantly.”
In a note issued earlier this week titled “Something Fishy in Massachusetts,” Bank of America economists reported that during the week ending May 6, initial jobless claims rose by 6,420 on a non-seasonally adjusted basis, accounting for 45% of the total increase of 13,969 claims. The outsized influence of Massachusetts’ claims was an anomaly, BofA economists wrote, noting that the state’s total employment accounts for under 3% of overall US employment, and its initial jobless claims are typically under 3% of all weekly US claims.
When excluding and recalculating filings in Massachusetts, initial claims have instead moved “sideways,” pointing to limited layoffs, economists Stephen Juneau and Michael Gapen wrote.
Continuing claims, however, appeared to be less distorted by the activity in Massachusetts, the economists wrote. Those continue to serve as a reflection of “stickier” unemployment, they wrote.
“After reevaluating the latest claims data, we take less signal from the initial claims data,” Juneau and Gapen wrote in the Tuesday note. “While there are signs that unemployed workers are having a harder time finding a new job due to lower hiring rates, layoffs remain low, and the labor market remains firm.”
Weekly jobless claims — which are highly volatile — remain below historical averages: In the decade before the pandemic, weekly claims averaged 311,000.
by tyler | May 17, 2023 | CNN, economy
The United States risks could run out of money to pay its bills if Congress is not able to reach an agreement on the debt ceiling. It could happen as soon as June 1, according to warnings from Treasury Secretary Janet Yellen, and could have potentially have far-reaching and dire consequences for Americans, including people who receive benefit payments or run a small business or who are trying to buy a home.
We’re hoping to hear from you about how closely you’re watching these developments; what actions, if any, you’ve taken to prepare in case of a default; and how you think this could affect you, your job and your family.
Please share your experiences and thoughts with us below.
by tyler | May 17, 2023 | CNN, economy
Alarm and frustration grow by the day over the debt-ceiling stalemate gripping Washington. On the line: American living standards, family budgets, and stability in the global financial system.
In theory, the debt ceiling should act as a fiscal restraint during the budgeting process. But after near meltdowns in 2011, 2013 and again today, many argue it’s time to take the political football off the field. The time for tax and spending choices by Congress is through the normal course of business. Deciding later not to pay the bills by not raising the debt ceiling is not sound fiscal policy.
Treasury Secretary Janet Yellen, a Democrat, has testified to Congress she would like it gone.
Federal Reserve Chairman Jerome Powell, a Republican, has said the debt ceiling is counterproductive.
And the CEO of the nation’s biggest bank, JPMorgan Chase’s Jamie Dimon turns visibly frustrated at the subject of the debt ceiling. He reiterated last week to Bloomberg News, “I would love to get rid of the debt ceiling.”
“There was I think reasonably good intent, you know, when this was first put on the books over 100 years ago to force lawmakers to come together and figure out how to make sure that the government’s fiscal situation is on sound ground, but that’s not what’s happening now,” Moody’s Analytics Chief Economist Mark Zandi told CNN’s Early Start. “It’s just creating all kinds of havoc,” he said.
It’s an almost universal view on Wall Street and in economics.
The Fed’s former vice chairman Roger Ferguson, now a fellow at the Council on Foreign Relations calls it an “antiquated mechanism that brings the country to the precipice of default every few years” and should be scrapped.
KPMG Chief Economist Diane Swonk says the politicization of the debt ceiling has weakened America.
“It is beyond time to rid ourselves of this antiquated law, which fails to actually invoke fiscal discipline, plays Russian Roulette with our status as a reserve currency and threatens to upend our economy,” she said.
“I fear if we do not abandon the debt ceiling and remove it from the arsenal of rules that can be used as a political piñata, we will incur more permanent damage to the US economy and our hegemony,” she said.
A default would threaten US Treasuries as the cornerstone of the financial system and undermine the US dollar as the world’s reserve currency. It’s a gift to America’s competitors, like China, as my colleague Stephen Collinson noted this week.
“From an economic perspective, debt ceiling negotiations are an inefficient use of time that carry potentially catastrophic risks for the creditworthiness of the US government,” agrees John Leer, chief economist at Morning Consult.
The ballot box and the budget process is where these decisions should be made.
“There’s a time and place for America’s elected officials to debate the country’s debt, and that’s during the legislative process,” says Leer. “When Congress passes bills, members are acutely aware of the budget implications of that legislation thanks to nonpartisan economists at the Congressional Budget Office,” he says. “Outside of the normal legislative process, Congress is also required by law to pass an annual budget resolution, but here again it frequently derelicts its responsibility.”
And the horse trading underway is more political than actually budget savvy.
“It doesn’t feel like even the solutions we’re coming up with here are going to address our long term fiscal problems,” says Zandi. “We’re talking about, you know, scaling back discretionary spending, non-defensive discretionary spending, but that’s not where the problem is with regard to our long-term fiscal problems,” he says.
Indeed, the major drivers of growth in the national debt are health care costs and payments for an aging population, net interest on the debt already accrued, and insufficient revenues. But debating tax hikes and reforms to popular programs like Medicare and Social Security are a non-starter. Budget experts agree it will take serious, hard, bipartisan work to prevent the national debt from choking the country in the decades ahead. Debt ceiling brinksmanship is anything but.
“Even the solutions we’re coming up with after all this drama isn’t really solving the problem,” says Zandi.
So is the solution to scrap it altogether, or come up with something better?
“The problem is we no longer budget – in fact, neither Budget Committee has even bothered to put forth a budget this year,” says Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget. “We need to reform the debt ceiling, because the risk of default only makes our economic and fiscal situation more precarious, but we need to replace it with something that would force lawmakers to adopt savings packages rather than the continued borrowing binge they are on,” she argues.
“For starters, rather than threatening not to pay our bills, lawmakers should promise not to engage in any new borrowing until our debt is under control, unless we are hit with an emergency where borrowing is needed.”
by tyler | May 15, 2023 | CNN, economy
Questions swirl about the strength of China’s recovery from Covid lockdowns, and there’s talk of recession in the United States. Yet Europe’s economic prospects have brightened in recent months, according to the European Commission.
The EU’s executive arm on Monday upgraded its growth outlook for 2023 and 2024. It now expects the EU economy to expand 1% this year, up from an estimate of 0.8% in February. Growth next year is pegged at 1.7%, an upward revision of 0.1 percentage points.
The improved forecast for Europe — which narrowly dodged a recession this winter — still represents a marked slowdown on last year, when the bloc’s economy grew 3.5%.
But it reflects sharply lower energy prices, which are reducing costs for businesses and easing the strain on households. A strong job market and ongoing government stimulus are also providing a lift.
Even so, the Commission acknowledged that higher borrowing costs aimed at taming rising prices will weigh on growth in the months to come. The European Central Bank raised interest rates by a quarter of a percentage point this month, the smallest increase since it started hiking in July, but hinted at further rate hikes to come given stubbornly high inflation.
“The key factors underpinning this forecast go in opposite directions: on the one hand, declining energy prices and a resilient labor market and, on the other hand, tightening financial conditions,” Paolo Gentiloni, the European Commission’s economy minister, said at a press conference.
“Heightened risk perception” among banks after recent tumult in the sector is making it harder to access credit, while rising rates are eating into loan demand, Gentiloni noted.
Significant divergence is also expected among countries in the European Union. Growth in Germany, the bloc’s biggest economy, is expected to slow sharply to 0.2% in 2023. Meanwhile, Italy’s output could increase by 1.2%, and Portugal’s economy could expand by 2.4%.
Separately, industrial production data for Europe published Monday showed signs of weakness. Production fell 4.1% in March among the 20 countries that use the euro, worse than economists had expected.
“With the tailwinds from lower energy prices and easing semiconductor shortages apparently exhausted and the economy struggling with tighter monetary policy, we expect industrial output to contract slightly over the rest of the year,” Andrew Kenningham, chief Europe economist at Capital Economics, said in a note to clients.
