(Bloomberg Opinion) -- As measured by employment and gross domestic product, the recession brought on by the Covid-19 pandemic has been the deepest since the Great Depression. Going by Bloomberg’s Corporate Bankruptcy Index, though, it’s a standard-issue downturn, nowhere near as bad as the recession of just over a decade ago.
This index, which was heavily affected by a few gigantic bankruptcies in 2008 and 2009 (Lehman Brothers, Washington Mutual, General Motors, CIT Group), is definitely not the only way to measure bankruptcy activity. Edward Altman, an emeritus professor at New York University’s Stern School of Business and a prominent bankruptcy analyst, favors simply counting the number of bankruptcies with liabilities of more than $1 billion, of which he says there have been 50 so far this year, breaking 2009’s full-year record of 49.
Then again, the total number of business bankruptcies is actually down. Federal courts data show business filings in the second quarter of this year (April through June) to be the lowest in more than a decade and nearly the lowest in four decades. Only the first two quarters after the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 took effect, raising the bar for both business and consumer filings, saw fewer.
Trillions of dollars of aid from Congress and the Federal Reserve have clearly played a role here, as has the mostly exuberant state of financial markets (which is not unrelated to all that aid from Washington). U.S. corporate bond issuance through the end of August totaled $1.73 trillion, according to the Securities Industry and Financial Markets Association, breaking the full-year record of $1.67 trillion set in 2017. During the last recession, bond issuance fell 38% from 2007 to 2008. This year to date, it’s up 83%. Although that channel of financing has not been available to smaller businesses, many of them have been able to avail themselves of the government’s Paycheck Protection Program.
Personal bankruptcies are down, too, with Chapter 7 and Chapter 13 filings through August of this year 27% lower than over the same period in 2019. And though some of the people hit hardest by this year’s downturn were perhaps so poor that they couldn’t get credit in the first place, meaning that their struggles wouldn’t show up in the bankruptcy statistics, on the whole those with family incomes of $40,000 or less surveyed by the Federal Reserve reported being in slightly better financial shape in July than before the pandemic.
With additional federal help looking less and less likely before November’s election, and the economy showing some signs of stalling from its rapid early-summer rebound, these positive trends won’t necessarily persist. “Once the government and Fed stimuli end, I feel there will be a spike in all bankruptcies,” Altman predicts.
Still, it seems clear that the size of the Coronavirus Aid, Relief, and Economic Security Act and the speed with which House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin cobbled it together in March have had a big positive effect. As economist and now Bloomberg Opinion contributor Claudia Sahm has been shouting from the rooftops for a while now, a quick (and preferably automatic) countercyclical response from Washington really can do a lot to reduce the pain of a recession.
There may be some other things going on as well. As is apparent from the above chart, business bankruptcies have been on a downward trend for decades. One explanation is, as already mentioned, legislative, but another is simply that there aren’t as many businesses out there to go bankrupt. Research in recent years has shown big declines in business dynamism in the U.S., with fewer startups and fast-growing small businesses but also fewer declining and failing ones.
One outgrowth of this research has been a new Census Bureau data series showing the weekly number of applications to the Internal Revenue Service for employer identification numbers. This year it has been surprising observers with the biggest numbers of new businesses on record — a record that, to be sure, only goes back to 2006.
The Census Bureau uses several filters to sort out businesses with a high propensity to employ others from self-employed individuals.(1)The latter group is responsible for the bulk of this year’s increase, not surprising in a recession year as people who lose jobs or income or are concerned about job security start independent businesses and side gigs, although the sheer number of such applications — 2 million so far this year — is remarkable. But businesses likely to become employers are also being formed in numbers not seen since before the last recession. The increase since April is really something.
Here’s another view of some of the same data, contrasting what has happened this year with the probably more customary (if especially bad) trajectory of 2008.
Again, the success of this spring’s recession-fighting efforts must be a factor here, but the cause of the downturn has probably played a role, too. A malfunctioning financial system was to blame for the last two recessions — maybe the last three — and the recoveries that followed were fraught with uncertainty and painfully slow. This time around the culprit has been a pandemic, and though we can’t know for certain when Covid-19 will fade into insignificance there’s reason to believe that it will stop depressing economic activity sometime next year.
For a lot of existing businesses that may not be soon enough: A member survey conducted last week by the American Hotel & Lodging Association found that 67% of hotel owners don’t think they can stay in business for six more months absent increases in occupancy levels or additional government aid. For those looking to start a new business, though, six months may look like a reasonable lead time. If enough of them get the timing right, maybe they’ll be another force driving a recovery that isn’t as painfully slow as the ones we’ve become accustomed to.
(1) From the Census Bureau's explanation: "High-propensity applications include applications: (a) for a corporate entity, (b) that indicate they are hiring employees, purchasing a business or changing organizational type, (c) that provide a first wages-paid date (planned wages); or (d) that have a NAICS industry code in manufacturing (31-33), retail stores (44), health care (62), or restaurants/food service (72)."
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Justin Fox is a Bloomberg Opinion columnist covering business. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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