Bankruptcies Rise for Two Consecutive Quarters
After years of declines, bankruptcies are on the rise again in the United States. Commercial bankruptcies have been rising since late 2015, while consumer bankruptcies posted back-to-back increases in January 2017; the first time since the financial crisis nearly seven years ago. Is this an anomaly or a warning sign of a U.S. economic collapse?
Total U.S. bankruptcy filings increased five percent in January 2017, to 55,212, from the January 2016 total of 52,560. Total bankruptcy filings in December 2016 were also up five percent year-over-year. This is the first time that total bankruptcies registered back-to-back monthly gains since 2010. (Source: “January Total Bankruptcy Filings Up 5 Percent from 2016, First Consecutive Monthly Year-over-Year Increases Since 2010,” American Bankruptcy Institute, February 3, 2017.)
States with the highest per capita filing rates (total filings per 1,000 population) in January 2017 were: Alabama (5.43), Tennessee (5.08), Georgia (4.30), Arkansas (3.44), and Illinois (3.41).
Broken down, consumer bankruptcy filings in the U.S. were up 5.4% year-over-year in January 2017, at 52,421. In January 2016, consumer bankruptcy filings totaled 49,733. Admittedly, 52,421 isn’t a massive number, and would only fill roughly 75% of the seats at NRG Stadium in Houston, where Super Bowl LI took place. But it is a disturbing trend, and it may be something that Wall Street will only look at in hindsight as a canary in a coal mine.
Commercial bankruptcies continue to surprise, rising throughout 2016. In fact, commercial bankruptcies increased 26% year-over-year to 37,823; the highest level since 2014.
U.S. Consumers Struggling with Debt
It wouldn’t be a big surprise to see total bankruptcies rise throughout 2017. As interest rates rise and the cost of borrowing becomes more expensive, debt-laden consumers and businesses will continue to seek shelter in bankruptcy.
Why? U.S. households are in debt to the tune of $12.0 trillion dollars. Roughly two-thirds of Americans are living paycheck-to-paycheck, and 57% don’t have enough money to cover a $500.00 emergency expense.
Moreover, in spite of so-called strong jobs data, wages simply haven’t recovered from the 2008 financial crisis. The typical American household still earns 2.4% less than it did in 1999, when income peaked.
Over the last 18 years, everything has become more expensive, significantly outpacing the rate of inflation. Americans are making less and getting in debt to pay more money for the same things they used to buy in 1999 at lower prices. (Source: “A $500 surprise expense would put most Americans into debt,” CBS, January 12, 2017.)
Despite rising debt loads and an increasing number of bankruptcies, Americans are increasingly confident about the U.S. economy. And they are optimistic that President Donald Trump’s proposed policies will help their bottom line.
What about Trump’s proposed overhaul of the U.S. tax system, which would, in theory, put more money in the pockets of Americans? If it becomes law, Americans can expect to take home more money. But the savings are skewed to favor those who make more money in the first place.
If you make $30,000 to $40,000, you can expect your after-tax income to increase around 1.2%. Here are some more figures:
- $40,000 to $50,000 income (+1.4% after-tax income increase)
- $50,000 to $75,000 (+1.8%)
- $75,000 to $100,000 (+1.9%)
- $100,000 to $200,000 (+2.3%)
- $200,000 to $500,000 (+3.8%)
- $500,000 to $1.0 million (+9.0%)
- $1.0 million-plus (+14.2%)
(Source: “Here’s how much money Americans could save — or lose — under Trump’s tax plan,” Business Insider, February 3, 2017.)
Business sentiment is also up since the election. Unfortunately, the economy hasn’t changed much since then. In the face of rising interest rates, businesses that have enjoyed eight years of cheap money are now facing a mountain of debt.
Again, it wouldn’t be a surprise to see the total number of bankruptcies increase throughout 2017. It’s an alarming trend that underscores just how fragile the U.S. economy is.