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Risk of shutdown and rise in bankruptcies imperil economy and financial markets

Is the other shoe about to drop on the U.S. economy? Let’s look at just some of the economic headwinds of the past few years:  The pandemic.  Supply-chain woes. Inflation. High Interest Rates. Bank failures.  Many predictions of a recession.  The recession has yet to materialize, and many recession prognosticators have changed their tune. 

They may be right, but there are two alarm bells worth noting: the risk of a government shutdown, and the current uptrend in U.S. bankruptcies.

The general stability of the economy, including the banking and financial services industry, is at risk if the government shuts down.  Nobody will be surprised if Congress fails to act by the end of next week, resulting in a shutdown.  Failing to meet the moment may be the one thing Congress does particularly well. 

There have been several shutdowns since the 1980s, with causes ranging from budget disputes to political standoffs.  Some have been very brief, but the longer they go on, the more damage they can cause.  If it happens next week, it does not appear that it will be short.

The normal flow of government services will be disrupted for sure.  Some federal employees may be furloughed or forced to work without pay.  The federal government is the country’s largest employer, with nearly four million employees.  Enough workers could be furloughed or denied pay to make an impact on consumer spending, which, in turn, could impact the businesses they frequent.  The impact on non-federal employees will be significant as well—slower air traffic, passport delays, closed national parks, fewer services.

Financial markets dislike uncertainty, and a government shutdown injects just that into the markets. The stock market has had a rollercoaster year and is still struggling to get back to where it was three months ago.  A shutdown almost guarantees volatility will continue. 

Depending on how long the shutdown lasts and the budget deal that eventually resolves it, our credit rating is also at risk.  Fitch downgraded the United States to AA+ in August, citing the growing national debt, erosion in standards of governance, and the expected fiscal deterioration of the government over the next few years. 

Although we are not in a recession, at least not yet, bankruptcies are on the rise. As we’ve written here before, many expected bankruptcies to increase once the pandemic hit.  But the results were just the opposite, thanks the influx of government money and generous lender forbearance, even if it was government mandated. 

The free money, restrictions on collection, and low interest rates are gone, and bankruptcies are following.  Maintaining that it may be a much-needed cold shower, the Financial Times predicts a wave of corporate bankruptcies and notes that U.S. corporate bankruptcy filings are on pace to be the highest since 2010. 

Citing statistics from Epiq Bankruptcy, the American Bankruptcy Institute reports that the number of total bankruptcies in October 2023 were up 24% from last year.  Individual filings increased 25% while commercial filings increased 14%. 

Total October filings were up 9% over September of this year.  Individual filings increased 9%, while commercial filings decreased by 1%. 

Even without a recession, the increase in filings signal continuing problems with the economy. Small businesses and families are over extended. Many businesses are filing for bankruptcy protection. Banks are still nervous about the failures earlier this year. Throw a government shutdown on top of that, and who knows what may happen.

At Dalton & Tomich, we counsel both small businesses and financial institutions on navigating the economy. We are able to facilitate creative solutions to otherwise devastating financial problems. Contact us today to discuss how we can assist your organization.

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