April 17, 2024

‘Something Very Strange’ Explains Why US Recession Has Been Delayed

  • “Something very strange has happened” in the economy that is preventing a recession, Societe Generale said.
  • The bank highlighted that as the Fed raised interest rates over the past year, net corporate interest payments actually fell.
  • This is how US businesses managed to steer through an extreme cycle of monetary tightening without triggering a recession.

Since the Federal Reserve began hiking interest rates last year, more and more economists warned that a US recession was imminent.

But that recession hasn’t come yet, and there is no sign that a recession is near even after reliable indicators like the inverted yield curve mask red flags.

According to Societe Generale, “something very strange has happened” that explains why the US recession has been delayed, and it has to do with some timely moves made by corporations.

The bank indicated that net corporate interest payments would rise going back to at least 1975 as the Fed raised interest rates. But for the first time in a long time, that is not happening. Instead, as the Fed has raised rates over the past 15 months, net corporate interest payments have actually fallen.

“Usually when interest rates rise, so do net debt payments, squeezing profit margins and slowing the economy. But not this time,” Societe Generale’s Albert Edwards said in a note Thursday, pointing to a chart he called the “strange” he’s seen in a long time.

corporate debt

General Association

So what exactly is happening?

It turns out that, during the period of near-zero interest rates, especially before the pandemic and during the pandemic, corporations took advantage and refinanced tons of their liabilities in long-term, low-rate, fixed debt.

According to data from Bank of America earlier this year, companies bought themselves some time to navigate higher rates. The debt composition of S&P 500 companies includes only 6% in short-term floating rate debt, just 8% in long-term floating-rate debt, 10% in short-term fixed debt, and a whopping 76% in long-term fixed debt.

This “helps explain the tardiness of the recession,” SocGen’s Edwards said, emphasizing that net interest payments have fallen 25% at a time when they would have risen sharply based on history.

“Companies have effectively played the yield curve backwards and have been the net beneficiaries of higher rates, adding 5% to profits over the past year instead of taking 10%+ off profits as usual,” said Edwards.

The lack of reduced profits prevented companies from resorting to a wave of layoffs that would disrupt the economy and send it into recession.

The low rate of long-term debt held by corporations, combined with their pricing power during a period of high inflation, means that most businesses have been able to increase profits in a big way.

“Interest rates are just working the way they once did. It’s a mad, mad world indeed,” Edwards said.

All this could change if companies have to refinance their debt at higher rates. But because most of their debt doesn’t mature until 2025, 2026, 2027 and beyond, interest rates could move lower between now and then, allowing companies to continue to fight low rates and eventually end the recession.

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