Rise of ‘Mega Bankruptcies’ Leaves Economists Worried

SVB Financial . Yellow . Bed Bath & Beyond . All big companies, all filed for bankruptcy.

And as The Wall Street Journal (WSJ) reported Sunday (Oct. 8), it’s part of a jump in Chapter 11 filings among larger companies that has economists worried.

Such filings tripled in the first half of the year, coming at a time when households have exhausted the savings they built up during the pandemic and banks are curtailing lending .

The increase in corporate bankruptcies “is a worrying sign for the outlook,” Stephen Brown , deputy chief North America economist at Capital Economics , told the WSJ. “Businesses that go bankrupt still have to cut costs, they still have to probably lay off workers.”

And while unemployment rates are still near 50-year lows and job growth is strong, the report notes that this growth is weaker at larger companies.

There were 16 “mega bankruptcies” — by companies with more than $1 billion in assets — in the first half of the year, compared to a half-year average of 11 between 2005 and 2022, the WSJ said, citing data from consulting firm Cornerstone Research.

The rise in bankruptcies, a tepid stock market and increased credit card delinquencies, indicate the American economy is heading for a recession, Steven Blitz , chief U.S. economist at GlobalData TS Lombard , told the WSJ. However, he thinks a downturn will still be much less dire than the 2007-09 recession.

“You’re not going to see the kind of bankruptcies and balance-sheet stress that you saw during that period,” Blitz said. The recent increase in bankruptcies doesn’t mean “the economy is heading into some doom-death loop.”

Meanwhile, personal bankruptcies are increasing as well. Data from “The Credit Accessibility Series: How Consumers Use Overdrafts,” a PYMNTS Intelligence and Sezzle collaboration, showed that some consumers reported having to file bankruptcy due to a lack of money to cover overdraft fees.

And data released by the Administrative Office of the U.S. Courts in July showed that bankruptcy filings in the country rose 10% in the year ending in June, compared with the previous year.

The double-digit spike is worth noting considering that filings “over any 12-month period have increased only rarely since filings peaked in 2010,” with bankruptcies falling “sharply after the pandemic began in early 2020,” per the data.