18 Jul 2023 3 min read

US bankruptcy surge fuels recession fears

By James Carrick , Rameet Gulsin

A leading indicator suggests US corporates are already struggling under the weight of higher rates.


Bloomberg’s proprietary dataset of US bankruptcy filings is sending a worrying signal.

Since the start of the year, the data suggest the number of companies filing for bankruptcy has shot up, much like in previous recessions in 2001, 2008 and 2020 – highlighted by the yellow bands in the chart below.

This proprietary dataset has historically tended to act as a signal of upcoming changes in official quarterly data on Chapter 11 filings or bank charge-offs (loans that have been written off as a loss).


What’s behind the rise?

We first wondered if the data might be distorted by a large number of microbusinesses going bust, perhaps reflecting the delayed effect of fraudulent lending taken out during the pandemic. If this were the case, the number of companies going bust would exaggerate the stress in the economy compared with a sales- or employee-weighted index.

Bloomberg provides data on the liabilities and assets of some (but not all) of the companies going bust. Examining this data, we found the median reported liability of companies filing for bankruptcy had not only increased since the start of the year, but was also similar to the level seen during the past two decades, and in previous recessions.

So, we don’t think the bankruptcy count is distorted by a large number of small companies going bust.


What does this mean for the economic outlook?

We think the rise in the number of companies filing for bankruptcy and the rise in the median liability of these companies increases the risk of recession through a self-reinforcing tightening of credit conditions and weaker growth.

We’ve shown before how banks become more cautious about lending when previous loans sour (for example, as delinquencies rise). Bank lending is pro-cyclical, making booms bigger and downturns deeper. Corporate distress is likely to keep banks cautious.

On the positive side, the surge in Bloomberg’s bankruptcy index in 2020 resulted in only a limited rise in bank charge-offs. This likely reflects the huge monetary and fiscal stimulus thrown at the economy, including offering companies government-backed loans via the Main Street Lending and the Paycheck Protection programmes.

This time is different. Policy is being restricted, not loosened. The rise in distress likely reflects the pain from higher interest rates. Leveraged-loan issuance has surged over the past decade. Given such loans are predominantly floating, this exposes companies to rises in the Fed funds rate, which has jumped by 500 basis points in just over a year.

In contrast to consensus optimism about a ‘soft landing’, we think a sustained rise in unemployment is needed to bring inflation down. We expect a recession soon and maintain caution on risky assets.


James Carrick

Global economist

James is a global economist with a knack for using analogies to explain economic concepts. He is a techno-optimist and an early adopter. He enjoys building models - both of the economy and robot Lego ones with his son. He also likes crunching data and chocolate bars. He joined in 2006 from the number-one ranked economics team at ABN AMRO with prior experience at HM Treasury.

James Carrick

Rameet Gulsin

Quantitative Economist

Ram first joined LGIM in 2015 as part of the Client Distribution team. After leaving his role to pursue research and teaching at the University of Kent, he was welcomed back into the Asset Allocation team as a Quantitative Economist in 2021. You’ll often find Ram reading from his favourite econometrics textbook. He’s recently discovered its hidden power of sending his new-born daughter straight to sleep.

Rameet Gulsin