Should We Worry About Rising Bankruptcy?
By Adam Thurgood on August 15, 2023
Bankruptcy is on the rise. According to the Bloomberg Bankruptcy index, the past year has seen a marked increase in bankruptcy activity. The Bloomberg Bankruptcy index equally considers the number of bankruptcies and the magnitude of the defaults to arrive at its value. In simple terms, higher is worse on the chart below (orange). The blue bars denote the percentage change in the index over the past twelve months. After a quick look, one might conclude that we are in serious trouble, with the index shooting up and the to right while the percentage change year-over-year hovers near 90%.
However, zooming out we can see that the current state of affairs is far from dire. Not only is the index below the long-term average, but the angle of ascent isn’t nearly as steep as we have seen in past episodes. The pain of the Great Recession surely stands out as a period of immense hardship and is enough to give anyone who was operating a business during that period a bit of PTSD. Sorry!
While the current situation doesn’t look too troubling, the path from here is a little dicey. The ISM Manufacturing index is a useful leading indicator of bankruptcy. In the chart below, I plotted the 12-month moving average of the bankruptcy index (orange) against the 12-month moving average of ISM Manufacturing (blue), advanced six months. This simple gauge would suggest that we should see the bankruptcy index spike over the next few quarters.
With ISM Manufacturing firmly in “recessionary” territory, it’s no surprise that bankruptcies would escalate. Whether or not the gap between these two metrics will fully close is yet to be determined. However, there is no current sign that the gap will be closed by an improvement in the manufacturing index, as we continue to see readings in contractionary territory. That being said, the new orders index might be providing a hint of positivity in an otherwise gloomy outlook.
The ISM New Orders index tends to lead the overall manufacturing index by a few months and looks like it may be stabilizing. The chart below depicts the 3-month moving average of the new orders index (orange) with the 3-month moving average of the manufacturing index lagged three months. While we haven’t seen a sustained increase in new orders, there appears to be some attempt at stabilization. If new orders can reverse course, it will be a welcome sign that the coming rise in bankruptcies is not to be feared. However, if new orders resume lower, it will be a very troubling sign for the economy.
