EconoMonitor

The Wilder View

The hottest trend in 2009: declaring bankruptcy

Bankruptcy filings are on the rise. With the ongoing destruction of wealth and employment, the number of consumers that file for bankruptcy protection is surging and likely to rise further. And consumers are beating down retail businesses. Increased consumer saving more is not necessarily a bad thing, unless one is a retailer; on weak consumer demand, 2009 is expected to bring further retail bankruptcies.

Here are some excerpts from a few of today’s bankruptcy articles.

Post-Christmas Sales May Not Help Retailers Salvage Holidays:

Retailers counting on post-Christmas sales to spruce up the sluggish holiday season may be disappointed as tapped-out shoppers turn their noses up at discounts of 70 percent or more.More than a dozen retailers, including electronics chain Circuit City, have sought bankruptcy protection this year as the credit squeeze and the U.S. recession drained sales. The holiday results indicate possible consolidation and further bankruptcy filings, said Gilbert Harrison, chief executive officer of retail advisory firm Financo Inc.

Retailers Brace for Major Change:

Other retailers are saying they will trim inventory and reduce the number of suppliers. That, in turn, will cause a ripple effect, prompting a number of weaker manufacturers, small brands and underfunded fashion labels to fail. New retail formats and concepts stores are likely to be curtailed in the coming year. And luxury-goods makers already are working to cut the long lead times between orders and store delivery as a way to reduce risk.

“We will have a lot fewer stores by the middle of 2009,” says Nancy Koehn, professor of business administration at Harvard Business School. “It’s happening very, very quickly because of the financial crisis and the recession.”

Mish Shedlock highlights the origins of Chapter 9 (municipal bankruptcy law) and several counties/states that will be affected in Massive Surge In Municipal Bankruptcies Coming:

Given that Florida is ground zero for the housing bust and Florida has no restrictions on filing Chapter 9, I confidently predict several cities or counties in Florida declare bankruptcy.

Rebecca here. Retailers are already running to the courts to file Chapter 7 or Chapter 11.

business_bankruptcy_chart.png

The chart illustrates the quarterly growth rate of total business bankruptcy filings – Chapter 11 filings + Chapter 7 filings – as reported by the Administrative Office of the U.S. Courts spanning 2006:3 through 2008:3. In 2008:3 (third quarter of 2008), total business bankruptcy filings surged by 20%, driven by a 50% rise in Chapter 11 bankruptcy filings.

Businesses account for 91% of total Chapter 11 bankruptcy filings, but only 4% of Chapter 7 filings, and accounted for most of the total bankruptcy filings (business + non-business) in 2008:3. But amid the carnage of the housing market, surging energy prices throughout most of the year, and a tanking labor market, non-business bankruptcy filings also surged in 2008.

total_bankruptcy_filings.png

The chart illustrates the quarterly growth in total bankruptcy filings spanning 1980:4 through 2008:3. The trend in 2008 is clear: consumers and firms alike are increasingly filing for bankruptcy protection. Although most of the third quarter surge is due to business filings, the surge in Chapter 7 filings in the first half of 2008 is not.

Annual Chapter 7 filings increased steadily from 34% in 2007:3 to 48% in 2008:3, and going forward, filings are likely to rise further. Consumers are becoming more and more indebted just to offset the drag on consumption coming from surging energy prices for most of 2008, destruction of housing and equity wealth, tight credit conditions, and the ever weakening labor market conditions (nice article by Mark Thoma).

Rising credit card indebtedness signals that an increasing number of consumer bankruptcy filings are on the horizon. Here is a chart from this article:

consumer_credit_chart.png

Finally, falling prices pose a risk. Falling prices (deflation) can put downward pressure on nominal variables like mortgage rates, car loan rates, and saving rates; it’s already happening. And for those of us with fixed mortgages or car loans – with no means of refinancing – paying off rising real debt may become more difficult, causing even more bankruptcy filings.

One thing is a near-certainty: the serious recession underway is likely to increase bankruptcy filings for businesses, consumers, and municipalities alike, as the labor market and consumer demand continue in reverse.


Originally published at the News N Economics blog and reproduced here with the author’s permission.

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