The sequelae of violent interest rate hikes are here!
The United States just announced the bankruptcy of the Heartland Tri-State Bank, and then broke out that the century-old transportation giant Yellow Company declared bankruptcy.
On July 31, local time in the United States, the “Wall Street Journal” released heavy news that the American transportation giant Yellow Company announced its closure on Sunday and immediately ceased operations, which will cause about 30,000 employees to lose their jobs.
The Yellow Roadway Group in the United States was established in 1924 and has a history of nearly a hundred years. It has more than 12,000 trucks and operates the largest and most comprehensive logistics business in North America. It provides transportation and logistics services to more than 800,000 customers around the world. The annual revenue was once as high as 95 One hundred million U.S. dollars.
Affected by inflation and slow economic recovery, the freight volume in the United States has fallen sharply in May, and the freight index has hit a new low in recent years. Yellow has lost $54.6 million in the first quarter. And as of the first quarter of this year, the company’s repayable debt was as high as US$1.5 billion, while all the company’s cash and cash equivalents were only US$100 million.
In fact, as early as 3 years ago, Yellow had already encountered a financial crisis. At that time, US President Trump once allocated 700 million US dollars in epidemic relief loans to save Yellow. Unexpectedly, despite the huge government assistance, the high labor costs And welfare expenditures, still completely defeated this century-old transportation giant.
Many people may wonder why the freight industry, as an indicator of the economy, can’t survive the economic recovery?
This is the point of contradiction in the current US economy. On the one hand, there is full employment and economic recovery; on the other hand, businesses frequently go bankrupt.
The U.S. Department of Commerce has just released preliminary estimates that the annualized growth rate of GDP in the second quarter was 2.4%, stronger than expected, and significantly faster than the 2% growth rate in the first quarter. The U.S. economy has basically withstood the test of a total of 525 basis points of interest rate hikes by the Federal Reserve since March 2022 to combat inflation. In addition, the latest data showed that the number of people applying for unemployment benefits for the first time continued to decline, and the US labor market continued to be tight. The unemployment rate in the United States was 3.6% in June, already approaching a new low in recent decades.
The economic recession that everyone predicted did not come.
But the flip side of the economy’s resilience is that the U.S. is heading for the biggest wave of corporate bankruptcies in a decade.
According to Bloomberg, the rate of bankruptcies of large companies this year is the second fastest since the 2008 financial crisis, second only to the early days of the new crown pandemic, and the number of bankruptcies hit a 13-year high.
S&P Global Market Intelligence: In the first four months of this year, 236 large U.S. companies have filed for bankruptcy, more than double the number in 2022 and the highest for the same period since 2010.
From the start of 2023 through June, the number of U.S. bankrupt companies hit 286, more than double the comparable figure a year earlier and higher than the first five months of any year since 2010.
Please note that this data monitors large enterprises, and small enterprises are not included in the statistics. With all the big companies down, it’s not hard to imagine how the small ones will fare.
Musk even predicted at the previous Tesla meeting that more companies will go bankrupt in the next 12 months.
Why is the U.S. economy falling into a vicious circle of economic recovery, but companies are accelerating their bankruptcy? This is mainly closely related to the roller coaster inflation and high interest rates in the United States.
Strong wage growth has boosted overall consumption as rising prices and a tight labor market have led to workers demanding higher wages. For example, personal consumption expenditures, which account for about 70 percent of the U.S. economy, rose 1.6 percent in the second quarter.
In other words, strong consumption power supports the recovery of the US economy.
On the other hand, while U.S. inflation has fallen sharply to 3% from a 41-year high last summer, the price paid is that U.S. interest rates are at historically high levels, which is deadly for businesses.
Because the increase in costs brought about by high inflation has led to a decrease in corporate profits; at the same time, the rapid decline in inflation has further depressed commodity prices, resulting in a further reduction in corporate profits, and companies that cannot bear it have to close their doors.
If inflation continues to exceed the Fed’s 2% target, interest rates will remain high, corporate profit margins will be further squeezed, more manufacturing companies will close down, and corporate bankruptcy will eventually affect corporate recovery.
Therefore, the decline in high inflation is indeed good news for the macro economy, but it may not necessarily be good news for the market.