Bankruptcy filings, in my opinion, are telling of Federal Reserve’s attempts at slowing down the economy.

Yesterday during a speech at an economic symposium in Jackson Hole, Wyoming, Jerome Powell, chairman of the Board of Governors of the Federal Reserve System, reiterated the central banking system’s initiative to get inflation down to two percent per year.

Said Chairman Powell: ” It is the Fed’s job to bring inflation down to our 2 percent goal, and we will do so. We have tightened policy significantly over the past year. Although inflation has moved down from its peak—a welcome development—it remains too high. We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”

Chairman Powell pointed out that one of the expected results from the Federal Reserve’s tightening of monetary policy would be a contraction in aggregate demand. In other words, bringing down increases in consumer prices could signal a reduction in demand for consumer goods and services.

Mr Powell described a decrease in personal consumption expenditures between June 2022 and July 2023 where the PCE index fell from a seven percent per annum increase in expenditures in June 2022 to a 3.3% increase per annum as reflected in the July 2023 data.

Still above two percent but moving in the right direction. Continued movement in the right direction, however, could mean increased unemployment. According to Chairman Powell. the labor market appears to be signaling a relaxing in wages.

Demand for labor has been moderating and job openings are trending lower. Wage growth has been slowing gradually. On the upside for households, real wage growth is growing while inflation is falling, according to Chairman Powell.

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One indicator that traders should be looking at is the increase in bankruptcy filings. According to data from US Courts.gov, the number of bankruptcies commenced has been increasing from the three-month period ending 31 March 2022 to the three-month period ending 30 June 2023.

The number of bankruptcies filed for the three-month period ending 31 March 2022 was 91,995. For the period ending 30 June 2022, the number of bankruptcies commenced amounted to 98,535. The number of filings continued to increase through the three months ending 30 September 2022 with 101,715 being filed.

The 2022 holiday season appeared to have given consumers and businesses some reprieve with the number of bankruptcies commenced decreasing to 95,416 for the three-month period ending 31 December 2022. Unfortunately, the number roared back to 107,541 for the three-month period ending 31 March 2023 and sits at 113,942 for the three-month period ending 30 June 2023.

The type of bankruptcies included chapters 7, 9, 11, 12, and 13.

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We cannot speak statistically to causation but do see a correlation between contraction in the economy and bankruptcy filings. If the Federal Reserve’s monetary policy is not yet done, the increase in bankruptcy filings may be far from over as well.

Alton Drew

27 August 2023

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