No Silver Lining in the Economic Forecast of America!
The continuing financial strain of a collapsing housing market, increasing unemployment, falling consumer disposable incomes and decreasing manufacturing is resulting in a surge of bankruptcy filings – both personal and commercial. The number of businesses filing for reorganization or liquidation has increased substantially in the past year. According to the American Bankruptcy Institute, Chapter 11 reorganizations increased a staggering 113% while Chapter 7 liquidations have climbed 57% and higher. And these numbers represent just the first six months of 2009! Certain districts appear to have been hit harder than others, as evidenced by the high percentage increases ranging from 69.9% to 92.9% compared to the prior year. Some industries have been more affected than others, in particular, the transportation, construction and manufacturing sectors. For those enterprises classified as a small business employing less than 100 people, the number of bankruptcies was up 81% at the end of the second quarter.
In addition to failing corporations, there are concerns about the state of some financial institutions. According to the Federal Deposit Insurance Corporation (FDIC), the number of loan losses from commercial and industrial companies is increasing. This has an impact on the success or failure of the lending institutions themselves. In 2009, the regulating authorities have already closed 98 banks, and that number is expected to exceed 130 by year’s end. Industry watch groups are advising that there are more than 460 banks that are potentially problematic for the FDIC. The combined assets of these troubled institutions exceed $290 billion.
While not all bankruptcies result in the closing of shop, for many, the reorganization process requires the downsizing of locations and operations, which usually means fewer personnel. While this is important to the success and future growth of the company, it has a significant effect on the community around it. In order for the U.S. Bureau of Labor to consider a group layoff a “mass layoff”, a single employer must release 50 or more employees. The statistics provided do not take into consideration closing or downsizing for the small business with less than 50 people on the payroll. Forbes reports that the number of layoffs since January 1, 2009 at the 500 largest public companies in America has reached 453,868. The trend is clear – layoffs, and subsequently unemployment, are on the rise. Currently unemployment is at a 26 year high at 9.8%.
Click to view larger Mass Layoffs or Number of Claims Filed.
This, in turn, leads to increased consumer bankruptcies – which are expected to exceed 1.4 million filings by the end of 2009. According to the American Bankruptcy Institute, the number filed has already reach 1,046,449 as of September 30, a 41% increase over 2008. The continuing struggle for consumers is also evidenced in the residential mortgage market. Mortgage delinquencies in the second quarter of 2009 increased 8.5% and foreclosures in process increased 2.9% compared to the prior quarter. Even those loans guaranteed by the Federal Government are showing an increase in delinquencies of 7.5%. While many loans have been renegotiated under the oversight of the federal government, 25% to 30% of these are failing with a “re-default” within three months.
Unfortunately, many economists are predicting that the cycle of consumer and commercial bankruptcies and the subsequent recovery of the U.S. economy will continue into the second half of 2010. With an economy historically driven by consumers accounting for 70% of the activity, the increased financial duress resulting in less and less money being spent means that the future remains uncertain for both commercial businesses and financial institutions.
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