GDP Growth Stalls as Corporate Defaults Soar to Six-Year High

GDP growth has slowed significantly while increasingly more companies are going broke and Americans are spending less.  According to the Atlantic Federal Reserve’s GDPNow forecast, expect to see 1.2% GDP growth in the first quarter of 2016, after seeing just 1% growth in the last quarter of 2015. This is a significantly lower rate of growth than the 2.0% growth seen in the third quarter, and a significantly lower level than most analysts had expected.

GDP growth has slowed significantly while increasingly more companies are going broke and Americans are spending less.  According to the Atlantic Federal Reserve’s GDPNow forecast, expect to see 1.2% GDP growth in the first quarter of 2016, after seeing just 1% growth in the last quarter of 2015. This is a significantly lower rate of growth than the 2.0% growth seen in the third quarter, and a significantly lower level than most analysts had expected.

Although many other estimates of GDP growth are significantly more bullish, the GDPNow indicator has weakened considerably in recent weeks, while manufacturing activity and consumer sentiment have weakened. In recent years, GDPNow has become a fast favorite of many investment banks and analysts because it has been much more accurate in predicting GDP growth rates compared to other, more traditional predictive methods.

As a result, some are cautioning that America’s relatively strong economic recovery of 2014 and 2015 may be a thing of the past and actual GDP growth is set to weaken and possibly fall into negative territory by the end of the year. Causes of America’s stalled growth cite flat real wages, weak manufacturing activity, feeble global demand, and the strong dollar.

Corporations Struggle to Pay Debts

Another significant drag on economic growth is debt, which Moody’s Investor Services is flagging as a worrying and endemic issue for American firms.

According to a recent study, Moody’s claimed U.S. corporations with below-investment grade ratings are set to default on their debts at the highest rate since 2010. The bond-rating firm claims that defaults will rise to 4.4% in 2016, up from 3.2% at the end of last year and more than double the 2% default rate in early 2015.

Moody’s also noted that defaults are sharply on the rise beyond the energy sector, where falling commodity prices have pressured margins and caused the least efficient companies to become unprofitable. However, the firm also points out that 40% of all defaults in the last quarter of 2015 were not in the energy sector.  Non-energy sector defaults in the junk bond market skyrocketed 800% from 2014 to 2015.

Part of the rising defaults are a result of weak demand and falling revenues, in part due to unstable demand for American goods and services abroad as the strong dollar makes American products less competitive for foreigners to buy.  Additionally, U.S. consumer spending has fallen 18% month-over-month in January from December—larger than expected—while economic confidence remains negative and real unemployment is almost 10%, according to a recent Gallup poll.

In that same report, however, Gallup was optimistic noting that January 2016’s average spending “with January 2015 [came in] for the highest average for the month since January 2008.” That said, the spending remains 16.5% below the average spending in the first month of 2008.