Despite the resilience of the US economy, experts caution that a recession is still possible. Recent data suggests that the number of corporate bankruptcies in April reached the highest level in a year, according to S&P Global. This increase can be attributed to fading hopes of an interest rate cut, leading struggling businesses to give up. Inflationary data in April also coincided with a rise in yields for junk-rated bonds.
The rise in corporate bankruptcies has come amid doubts about the Federal Reserve’s willingness to lower interest rates. Since interest rates have been steady between 5.25% and 5.50% since last July, many businesses were hoping for a rate cut to ease their financial burdens. However, hopes for an early rate cut have been diminished by strong economic data and inflation rates, with some analysts pushing back expectations for a rate cut to as far as December.
Despite a brief scare of stagflation in April, the focus now remains on lowering inflation rates before considering an interest rate cut. The failure to lower interest rates has caused many businesses to suffer, leading to the highest number of bankruptcies in a year in April. Sectors such as consumer discretionary, healthcare, and industrials were the hardest hit by bankruptcies in the same month.
Analysts warn that maintaining unchanged monetary policy for too long could lead to negative consequences for the economy. The possibility of negative outcomes increases the longer interest rates remain untouched, according to economists like Frances Donald from Manulife Investment Management. The risk of a recession remains on the table unless there is a change in policy to address the current economic challenges.
In conclusion, while the US economy has shown resilience despite some challenges like rising corporate bankruptcies and inflationary data, experts caution that it’s not enough yet and there’s still a possibility of recession if monetary policy is not changed soon enough to address current economic challenges such as high business struggles due to lack of interest rate cuts and low inflation rates before considering an interest rate cut again.
