Historic Surge in US Corporate Bankruptcies Amid High Interest Rates

Clear Facts

• A “historic surge” of corporate bankruptcies is happening in the United States due to struggling debt-ridden companies failing to adjust to the high-interest rate environment.
• In June, 75 companies filed for bankruptcy, the highest monthly figure since early 2020. The total number of bankruptcies in 2022 so far is 346, a significant increase compared to the past 13 years.
• The spike in bankruptcies is attributed to high-interest rates, supply chain complications, and a decrease in consumer spending.

The United States is experiencing a significant rise in corporate bankruptcies, the likes of which haven’t been seen since the peak of the COVID-19 pandemic. The uptick in bankruptcies is a clear indication of the financial struggle businesses are facing due to the current high-interest rate environment.

Data reveals that a total of 75 firms filed for bankruptcy in June. This alarming statistic hasn’t been seen since the onset of the pandemic in 2020 and brings the total number of bankruptcies for the year so far to 346. This figure is significantly higher than data seen in the previous 13 years.

The highest half-year figure prior to this was recorded in 2010, with 437 companies going bankrupt between January and June. The report highlights high interest rates, supply chain disruptions, and slowing consumer spending as principal factors contributing to the sharp rise in bankruptcies this year.

The Federal Reserve’s decision to significantly hike interest rates in 2022 and 2023, the highest since 2001, was taken to curb rampant inflation. This move ended over a decade of easy-money policies. The authorities are now wrestling with the timing of easing off on these measures amidst signs of slowing economic growth and receding inflation.

Investors are currently predicting the Federal Reserve will start to cut rates later this year, likely in September or November. They foresee only one or two rate cuts this year, a massive change from the start of the year when six rate cuts were expected as early as March. Despite these anticipated reductions, interest rates are expected to remain elevated.

High-interest rates are causing concern among some economists, who argue that these rates may pose a risk to the financial system. The economy has weathered the higher-for-longer strategy admirably well, but there is a threat that the ongoing pressure will expose fault lines in the financial system.

Bankruptcies began to spike notably in April as businesses started to “feel the burden of high interest rates.” The realization that rates would not decrease in the near term exacerbated the situation. “Fading hopes of lower interest rates are likely contributing to the increase in filings, as companies that may have held out hope for rate cuts at the beginning of the year come to terms with the reality that they will remain higher for longer.”

Among the notable bankruptcies in June were Fisker, the electric-vehicle manufacturer, and Chicken Soup for the Soul, the parent company of DVD rental chain Redbox.

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