The Unstable Insolvency Environment in the United States
For nine years, the United States has seen annual decreases in the number of US businesses filing bankruptcy. However, bankruptcy filings have increased once again in 2019 by 2.5% year-on-year. This was, in part, due to companies facing higher financing costs after the Federal Reserve System’s tightening policies that occurred in 2018 and 2019. A rocky situation was exacerbated by trade policy uncertainty, which has increasingly affected the ability of businesses to invest as higher import costs began cutting into their profits.
With bankruptcies projected to rise as much as 4% in 2020, the monetary policy loosening that began in 2019 may not be enough. The increase in import costs, and lower investments due in part to the uneasiness over trade issues, continue to hinder businesses. Retailers are especially vulnerable to higher import costs, while those in the agricultural sector are facing higher insolvencies due to bilateral trade barriers.
There is a situation in which the projected insolvencies in 2020 could be even higher.
With the US debt increasing, businesses have been quick to take advantage of the easy
access to finance at lower interest rates. Businesses are also taking advantage of the
wide availability of capital. Instead of investing in the economy, they are paying out
larger sums of money to shareholders. Even though household finances have improved
greatly over the last decade, this higher corporate debt and poor creditworthiness of
businesses may just lead to a greater number of insolvencies.