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By Ross Waetzman. CIRA, CDBV, Director, Corporate Recovery
Bankruptcy professionals thrive during recessions. After a prolonged economic boom, they want to know, “Are we there yet?” and, “Just how many hours can we bill?”
Recessions are generally caused by gross domestic product (GDP) declines (i.e., consumption by individuals, businesses, and government). This matters because reduced spending means businesses sell less—unless they sell bankruptcy services. Companies fire employees and reduce expenditures in an effort to avoid bankruptcy professionals. These actions also further reduce spending, which further reduces GDP.
The cycle typically repeats until the Fed lowers interest rates, allowing businesses to borrow more cheaply, invest in projects, and drive demand for labor through increased hiring.
Unemployment, however, is historically low, and consumers are still spending. Q2 corporate earnings are 6.2% higher than the prior year, and 75% of public companies report earnings that beat their guidance (vs. a 66% historical average). Labor is hard to find, a condition economists may attribute to full employment with all, or nearly all able-bodied persons having jobs.
Even if a recession is upon us, corporations are unlikely to deploy mass layoffs because labor is just too hard to find. So, if a recession happens but nobody loses a job, does it matter? For bankruptcy professionals, it counts as much as the sound of a tree falling in Mongolia—that is, not at all.
Housing prices and supply shortages have primarily driven core inflation (inflation before consideration of food or energy prices). Rising rates and growing housing inventories are already taming the former. Supply shocks are becoming less of an issue as COVID-19 softly fades from daily thought.
Slowing inflation and full employment reduce Fed pressure to raise rates. Fed fund rates are still historically low and should not slow GDP growth much. The risk of the Fed triggering an “ugly” recession is falling.
This doesn’t mean the U.S. won’t see a pullback in demand because slower growth is not the same as negative growth. In summary, the U.S. economy is likely making a soft landing that yields little, if any, immediate noise in bankruptcy circles.