The Ripple Effect of Consumer & Corporate Bankruptcy
The nation's largest law firms are already reporting that 2008 will be a year of bankrupt consumers, homeowners, and companies. Consumers are struggling financially due to myriad factors: increased costs of living, high fuel prices, and increasing debt. All of this leads to less discretionary funds and, for some consumers, an inability to pay even basic expenses. The decrease of discretionary consumer spending, in addition to rising overhead costs, is putting additional financial strain on companies already struggling with diminishing profit margins. Financial institutions are facing a higher number of accounts in default, both by consumers and corporations, forcing tighter lending requirements. As companies begin to file bankruptcy, close, and liquidate, the cycle continues. Already the level of unemployment is on the rise, continuing to feed the cycle.
Consumer Price Index & Cost of Living Adjustment
The Consumer Price Index (CPI) is based on food, clothing, shelter, and other goods and services that people require for day-to-day living. According to the U.S. Department of Labor, the CPI was 4% higher in March 2008 than the previous year. However, some items have increased significantly more than the CPI, such as dairy products (13%); meat (6%); baked items (4.6%); and food and beverage (4.4%).
The second component is the Cost of Living Adjustment (COLA). For those that are social security recipients or retired federal employees, the COLA has increased by 2.3% for 2008 and lawmakers are receiving an adjustment of 2.5%. The National Compensation Survey: Occupational Wages in the United States, published in June of each year, shows that wages increased from 2005 to 2006 for civilian hourly workers by 3.5%; private industry hourly workers by 4.1%; and state and local government hourly workers by 2.9%.
Unfortunately, for a large portion of the working population, the cost of living adjustments are not adequate to cover the increased costs as portrayed by the consumer price index. Wage increases continue to fall behind inflation, meaning many employees are actually earning less than a year earlier.
Consumer Bankruptcy & Foreclosures
The number of Americans that filed for bankruptcy in March increased by 13% from February; February increased 18% compared to January. According to the American Bankruptcy Institute, bankruptcy filings for the first quarter of 2008 increased 27% nationwide. In 2007, the number of citizen bankruptcies totaled 826,732 but is expected to shoot higher than 1 million in 2008. The states which have been most affected during the first quarter of 2008 thus far are California, Maryland, and Florida with increases in bankruptcy filings of 26%-33%. These bankruptcy filings by consumers are being blamed on rising unemployment, high debt loads, plunging housing values, and soaring gasoline prices.
Various reports by financial and housing market experts are predicting the number of foreclosures for 2008 to range from 1.4 million to as high as 2.5 million. In the fourth quarter of 2007, it was reported that the economic fallout from the mortgage crisis would be substantial in the upcoming year - the delinquency on home mortgages sparked by falling home prices and increases in interest rates on adjustable home mortgages. This year, 1.5 million loans, representing 40% of the adjustable rate mortgages, are scheduled to reset their interest rates, raising monthly payments by 10% or more. With falling home prices and tighter lending standards, many homeowners will be unable to refinance to avoid the substantial increase, further increasing the financial strain.
Corporate Bankruptcy
The ripple effect of consumers under financial duress is being felt in corporate America. The laboring economy and tightened lending is starting to impact struggling companies. Forty-four publicly traded companies filed for bankruptcy protection from January 1 to March 30, 2008 - more than double the number of filings for the same period in 2007. Many of the companies that are seeking bankruptcy are dependent on the sale of discretionary items to consumers. Coupled with rising overhead costs and limited financial cushion, it is clear that there will be more bankruptcies and out of court restructurings in the months ahead. Bankruptcy experts are anticipating that more than 100 public companies will file for protection this year.
Unemployment
According to the U.S. Department of Labor, during the first quarter of 2008, unemployment increased by 232,000 and increased from 4.8% in February to 5.1% in March. Over the past 12 months, unemployment increased by 914,000. In the same report, the following industries were noted:
| Industry | Increase in Unemployment (March 2008) |
|---|---|
| Construction | 51,000 |
| Manufacturing | 48,000 |
| Automotive Industry (vehicles & parts) | 24,000 |
| Retail | 19,000 |
| Wood Products | 5,000 |
| Non-metallic Mineral Products | 5,000 |
| Furniture and Related Products | 5,000 |
The industries that have been the hardest hit over the past 12 months include: manufacturing (310,000); retail (107,000); and automotive (72,000). Since October 2006, the construction industry (394,000) and financial services (credit) industry (120,000) have been increasing in unemployment. For the manufacturing and construction industries, this downward trend is the biggest in five years.
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