ROB SCHMITZ, HOST:
Many Americans are struggling to pay their bills, and so are many American companies. This year, corporate bankruptcies have surged and are on pace to hit a 15-year high. Well-known companies like Spirit Airlines and the retailer Claire's are among the casualties. Edward Altman is professor at New York University and specializes in corporate bankruptcy. He joins me now from New York. Good morning, Edward.
EDWARD ALTMAN: Good morning. How are you, sir?
SCHMITZ: I'm well. Thank you. Why are so many companies going bankrupt right now?
ALTMAN: Actually, it's a combination of things. Going back to the days of COVID, interest rates fell dramatically due to the central banks lowering the interest rates so that companies could access capital and survive during lockdowns. And companies took out loans, paying those loans based on what's called a floating rate basis. That implies that as interest rates changes, up or down, the cost to the companies change in the same way. So there was a big buildup in debt at very low interest rates. And this continued for several years through 2022. Subsequent to that, interest rates started rising in 2023, '24, '25. And so as a result, companies which were able to survive under very low interest rates no longer could withstand those higher interest rates across many different sectors.
SCHMITZ: Yeah. So it sounds from what you're saying is that a lot of this actually is sort of a hangover from the pandemic and the economic impact of that.
ALTMAN: I'd say that's definitely a significant part of it. But the other part is the tariff situations, and particularly, it's hitting small and medium-sized firms across the country. Farmers, for example, have had a record amount of bankruptcies as well. And the reason for that is these companies generally operate at very vulnerable margins. Their costs are being increased without them being able to increase the demand and pass it along to customers.
SCHMITZ: What sectors are we seeing that have higher rates of bankruptcy right now?
ALTMAN: Leading the pack, so to speak, real estate companies. And these are companies that, again, borrowed very highly at low interest rates. Plus, they have large vacancy rates, particularly commercial real estate. For example, San Diego, downtown, has a vacancy rate of about 35%. Following that, health care and medical companies. After that, we have construction supplies 'cause that's tied to real estate. And then the usual characters, so to speak, that fail as the economy becomes softer are restaurants and retail. So I'm not surprised we are having such large numbers of bankruptcies. But I was struck by the fact that it started going up dramatically when the economy was posting pretty large and positive GDP numbers.
SCHMITZ: Now, as you mentioned, the U.S. economy - as measured by GDP - is on track to grow this year yet we're seeing record numbers of corporate bankruptcies. Help make sense of that for us.
ALTMAN: The economy may seem so strong in terms of very large companies, technology companies doing so well, bolstering the economy. But most of the economy, small and medium-sized companies in particular, are suffering dramatically. It's a soft underbelly in the economy in certain sectors.
SCHMITZ: How is this going to impact the labor market?
ALTMAN: I find that the credit cycle tends to lead the business cycle. In other words, if you have a big increase in defaults - and there are various measures of defaults, but bankruptcies are certainly one of them - then it usually is between one and a half and three years later that the economy begins to suffer. It's an indication of softness in the economy that doesn't show up in the GDP numbers, especially if those GDP numbers are impacted dramatically by very large, very solvent companies. You know, Nvidia is not going bankrupt. Other companies in AI and infrastructure and data centers, etc., booming. But they don't provide as many jobs as you would think. So I'm worried about the softness of the labor market and the employment in our country.
SCHMITZ: That's Edward Altman. He's a professor at New York University. Edward, thank you.
ALTMAN: You're welcome. Transcript provided by NPR, Copyright NPR.
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