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Bankruptcies are Contagious

The economic impact of skyrocketing bankruptcy filings.

There is some discrepancy between market performance and economic conditions — The stock market is not the economy. What is happening in the stock market is universally perplexing and a different discussion altogether.

The economy on the other hand is not doing well. Bankruptcy filings are through the roof, earnings have plummeted, and a large number of companies that shut down due to the pandemic appear to have no plans to re-open. The brick and mortar retail sector appears to be the canary in the coal mine. Bankruptcy filings in the last few months exceed total bankruptcies for the last several years combined.

These are not just mom-and-pop retailers either – they’re well-known enterprises like Nordstrom, GNC, Lucky, Brooks Brothers, Pier 1, Tuesday Mornings, and JC Penny.

Most were already struggling before the shut down, but now formerly healthy and robust companies are struggling as well. This is happening faster than many analysts expected. Traditionally, interest rates to go up a little bit before we start seeing increased bankruptcy filings. The fact that we are seeing so many bankruptcies happen when it has never been easier or cheaper to get loans is concerning.

Bankruptcies are contagious. Businesses that sell or service retailers will soon start failing as there are fewer and fewer retailers for them to sell to. Several companies that operate malls have already said that they believe bankruptcy is imminent. When bankruptcies become contagious, the spread happens slowly and can go on for years.

Despite record results in the equity markets, economic conditions are not good for the majority of business owners and workers. The housing market is finally showing cracks with the moratorium on evictions and foreclosures ending in the next 30 days. Calls to financial help services for renters and homeowners are up more than 70% this month. There appears to be a widespread denial of our economic state taking hold, based on stock market performance rather than overall economic conditions. I hope that our collective will is strong enough to push through this recession. However, I fear the reality of double-digit unemployment and record breaking bankruptcy filings will eventually force an uncomfortable reconciliation with reality.

About the Author

Nathaniel Curtis is Senior Managing Director at Resolute. An experienced professional with in the management consulting industry, his experience includes numerous nationally recognized engagements involving Labor, Employment, Discrimination and Defamation Consulting as well as involvement in several Commercial Litigation cases.