Be Well: How Rising Interest Impacts Corporate Default Rates

<div class="block">Marty Cantor, CPA and economic development consultant, joined Cheddar News to talk about the state of the economy, and more specifically, the impact of federal rate hikes on corporations. </div>

beWell

Today, we're talking about some of our business headlines. We want to start with corporate default rates. So what we know, obviously, the Federal Reserve does plan to keep hiking interest rates to stem inflation, which could end up, meaning an increase in corporate default rates could happen in the coming months. So in May we take a look back and the corporate default rate did rise again. A sign the US companies are struggling with the higher interest rates that make it more expensive to refinance their debt. There have been 41 defaults in the US, that one that also happened in Canada that so far this year that makes us globally, you know, more, you know, the biggest area that is having this problem and when we take a look at last year, we're double the same time period. Well, the real, the real story here is that corporate corporate America is not generating enough revenues. You know, we see the gross domestic products has been dropping since last September and the corporate profitability rate. 4% of corporations uh rather uh corporate profits dropped 4% in the fourth quarter. They dropped 2% in the first quarter of 2023. And they're expected to drop 6.4% in the second quarter. So that tells you that corporate America is having a problem paying its bills and also getting revenues. And the other point is is that consumers are now becoming more concerned about how they spend their money. So that's the biggest story about in the rates, has less to do. I believe about refinancing cost because of the inverted rate curve. It's cheaper to borrow long term and short term. So it's, I think it's more about the economy is now starting to really feel the impact of the Federal Reserve's interest rate increases and they're expected to increase another two point uh another 50 basis points before the end of the year because their target rate was 5% 5.5% rather of, of interest rates started this so far, 10 consecutive interest rate increases in a row. Right. All right. Let's talk about you. We're kind of alluding to it. People having the same issues with money management that new report from Doo on how Americans are paying their bills. 73% of consumers say these higher prices have affected their ability to cover their monthly expenses. I'm talking about your cell phone bills, your auto insurance, cable, internet, things like that. And right now, Americans owe nearly $1 trillion in credit card debt, which is a record high and that's the most data from the Federal Reserve Bank of New York. Yeah. And add that to the fact that the first quarter of this year debt increased 100 and 48 billion. So now total household debt is up 7.9% as that's $17 trillion. That's enormous. And 71% of that debt is mortgages, 9% of student loans and 9% of auto. So all these uh costs, uh with wages now, uh, not going up as much as inflation. Now. There's a, there's really a crunch on the household budget and, and debt is fueling this as well as people now deciding where they want to spend their money. And we're seeing that reflected in corporate revenues and gross domestic product and with these defaults and we know that fewer than half of Americans say they have enough for, uh, should an emergency happen? You would think they would want three months, I think you say six months, right. But they just don't have it. Yeah, we've been saying six months for a long time, uh, six months of household expenses, but they don't have it anymore because the, the nation's money supply since last April is down $1 trillion. That's a lot of money that's impacting the households. That means there's less government money, families pocketbooks to spend with the Federal Reserve is taking $95 billion a month out of the money supply. That's why there's less money. That's why people are going into credit cards and that's why if it continues this way, you know, we could, we could be facing a recession if businesses become impacted and they start firing people. Well, one thing that people will have to pay more for, it looks like is homeowner insurance. It's becoming even more expensive and in some places is really difficult to find. Yeah. Well, my daughter is in Florida and, uh, and she is now uh uh she's looking for insurance based on cost. Two major companies have left uh the cost of rebuilding because of the increased construction cost because of inflation. Uh It costs a lot of money. Insurance companies have to have to provide that rebuilding cost. They're losing money, the reinsurance where they, they get help with their liabilities, insurance companies, it's very difficult. People are now shopping around for price rather than coverage on insurance and that's what's going on in Florida because of the hurricanes California because of the wildfires. So insurance companies are taking a harder look and they're starting to lose money as well costing consumers more money. Well, one bright spot in all of this is 401 Ks and more Americans are saving for their retirement investing in their 401k plans. Now, obviously, we know more companies are going to have to do under the law next year, but they're already doing. According to Vanguard Group, more participation in those plans. It's reached an all time high. Well, it's super that they're doing that you can't retire just on social security. You need outside income. You need a pension plan. I think it's about time the federal government is requiring it and employee used to be, employees could opt out. But I'm glad now that it has to because the money is needed when you retire. Which is great because that's 3% of their salary last, but not least I just want to get to this artificial intelligence, possibly changing the work. Especially for women. Well, women are the biggest increase in the workforce and a lot of them are working hybrid if you don't have to use your hands to build something and you're using, uh, uh, and you don't have to be, uh, face to face. Uh, and it can, and your job can be taken over. Just think when you dial, uh, on a phone for a company you don't get a person anymore. You get artificial intelligence. Those are the jobs that women used to fill. Right. Because carpentry and electrical work that would be difficult to automate. All right. Thanks so much, Marty. I appreciate it.