Consider what has happened so far this year. Small business bankruptcies within Chapter 11 (specifically Chapter 5 elections) have increased consistently through the first nine months of this year, making it appear that corporate finances are deteriorating.
But thanks to extraordinary support from the federal government, business failures have been uniquely low during the COVID-19 pandemic. Businesses that would have collapsed if not for the disruption caused by the coronavirus have survived. It is therefore likely that part of the increase in insolvency activity is simply a return to 'normal' levels from artificially compressed levels in 2021-2022. Of course, that doesn't mean small businesses are completely safe, especially after the recent rise in borrowing costs.
Sienna Mori of Goldman Sachs Group Inc. summed up the situation in a note to clients on October 24th (emphasis mine):
Given that small businesses are more sensitive to variable rate debt and that funding costs and policy support (like the PPP in 2020) are less likely to be alleviated, the pace of bankruptcies will continue to return to historical norms. is expected. However, we believe that a sharp increase is unlikely unless there is a full-scale recession or significant tightening of lending conditions.
Based on this view, Mori argued that there is “limited risk” of accelerated defaults severe enough to develop into macroeconomic shocks in and of themselves. Although this is his view of just one company, it is supported by other recent data on the health of America's smallest companies. First of all, small businesses continue to hire. According to the Intuit QuickBooks Small Business Index, which measures employment in small businesses with 1 to 9 employees, payrolls in September totaled a seasonally adjusted 13.2 million, an increase of about 1.3% from the same month last year. did. That's a little weaker than the overall trend in U.S. payroll growth tracked by the Bureau of Labor Statistics, which has increased by about 2.1% over the past year, but it's nothing to sneeze at. Employment at small and medium-sized enterprises is booming not only in the education and medical services sectors, but also in the leisure and hospitality industries.
Small and medium-sized businesses are still investing money. Another report published this month by the Bank of America Institute uses proprietary data to show that payments per small business customer have increased in recent months (despite a 4% year-over-year decline in September). It showed that the amount was almost stable. An effect that the report's authors largely blame on the calendar. )
Here are some lessons from Bank of America Institute economists Anna Chow and Taylor Bowley:
…growth in small business spending has slowed from the rate of increase in 2022, but has remained broadly stable over the past few months… Within the sector, growth in payments spending for health services has been relatively stable. We continue to see strong performance.
I'm not saying it's all completely honky dory. Small business optimism fell by half a percentage point in September, extending the index's generally negative period of about 16 months, according to a survey by the National Federation of Independent Business. Sooner or later, negative emotions can become a self-fulfilling prophecy. But the 2022-2023 economy showed that consumers and business owners alike don't always act on their emotions. This may be especially true of the NFIB survey, which has a well-known Republican bias in its sample and may tell us as much about the state of U.S. politics as it does the economy.
A final point to note is that the small business bankruptcy environment is independent of business cycles and is undergoing some major changes. Traditionally, small and medium-sized businesses have tended to simply close up shop and exit when they struggle or fail. Any involvement in bankruptcy law often involves pursuing liquidation rather than a complex and costly reorganization process to rescue the business.
In 2019 (and effective in 2020), an act of Congress created Chapter V within Chapter 11, making small business restructuring cheaper and less technically burdensome. It could eventually lead to bankruptcy data reflecting small business activity, and supporters of the change think that's a good thing. “Part of the growth you're seeing is just more comfort with this,” David Cox, managing partner at Cox Law Group, told me Thursday.
At the beginning of the pandemic, the Subchapter V option was expanded to companies with as much as $7.5 million in debt, up from an original cap of $2.7 million, and that cap could be eliminated next year. There is also speculation that some companies may apply early to take advantage of the program before the opportunity is lost. Here Sonito Kapila, president of the American Bankruptcy Institute, talks about the paper in an interview with me.
It's a little early for that. But as we get closer to the new year and into the second half of the first quarter, I think that characteristic may become more important due to the uncertainty of whether the debt ceiling will remain in place.
Ultimately, recession watchers should be wary of jumping to conclusions about increased small business bankruptcy activity. Small businesses' exposure to floating-rate debt can be a leading indicator of the U.S. economy, but so far they've largely sent a message of resilience. And that may mean the U.S. economy can continue to float as well.
More from Bloomberg Opinion:
• Americans love to share bad economic news too much: Claudia Sahm
• Prepare for trade ups, downturns, or both: John Ozers
• What we learned from Powell's fight against inflation: Jonathan Levin
(1) Although the definition of a small business varies by organization, we use the Small Business Administration's definition of fewer than 500 employees here. Some of the data here is about very small companies, and I've tried to address the different criteria on which it appears.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Jonathan Levin is a columnist specializing in U.S. markets and the economy. Previously, he worked as a journalist for Bloomberg in the United States, Brazil, and Mexico. He is a CFA charter holder.
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