The economic news has been positive for long enough now to convince even most of the naysayers that a recovery is indeed underway. Jobs are being added at an impressive clip, spending is up, the stock market is improving, and things are generally looking brighter for the future. There are always contradictions in the economy and the occasional bad news item will continue to surface, but for the most part things are looking good.
In the midst of all of this positive news about America’s economic engine revving up, there’s been a sour, but not unexpected, note. Bankruptcies are reaching new highs. According to the American Bankruptcy Institute, some 1,625,208 Americans declared personal bankruptcy in 2003; 88,687 of them were Texans. Compared to 2002, the pace of bankruptcies in the US was up significantly (over 5%). In Texas, however, the total for 2003 was more than 15% higher than 2002. The economy is far better now, so the surge in bankruptcy filings is surprising—and alarming—to many. The answer lies in the calendar.
For thousands of American families, the recovery was too late. Debt came home to roost with a vengeance for some people, and the result was bankruptcies. Consumer spending and debt built up over a decade added to the crisis situations felt in thousands of households as the economy struggled during the past few years. A lost job, unexpected expense, or divorce could tip the scale.
The upward swing in bankruptcy filings is clearly a bad thing for those involved. For a number of years to come, they will be essentially unable to get credit. They will find it more difficult to buy cars and make other major purchases. They may face higher insurance rates. Without a doubt, they will lose flexibility in the way they deal with household budgeting issues. Declaring bankruptcy is a last resort, necessary at times, but certainly disruptive to a household’s economy.
Nonetheless, I am not alarmed by the recent upswing in bankruptcies. For one thing, it has nothing to do with what’s going on now. People don’t decide to file on the spur of the moment. Instead, the usual process involves months of struggling before a lawyer is called in. The data itself is for the full year of 2003, thus making it stale by several months at least. It’s what economists call a “lagging indicator.” In other words, it indicates how bad things were in the past rather than reflecting current or future conditions. I don’t know a single well-run company that doesn’t have something built in for bad debt. It’s unavoidable. It was also good news to see that business filings were actually down.
As a state, we continue to account for about 5% of all filings in the US, a statistic which has been remarkably stable over the past several years. Given that Texas comprises a slightly larger proportion of the US population (over 7%), we’re not doing so bad on a per-capita basis. The fact that the Southern District of Texas topped a list of federal court districts with the highest increases in filings was not good news, but it’s not necessarily a sign of poor conditions today.
I spend a good bit of my time analyzing numbers to arrive at forecasts. I worry over certain bits of information and put less emphasis on others. The most important, naturally, are the leading indicators, or those trends and events in the economy that tend to precede a full-blown swing. There are other facts and figures that are not relevant to my perception about today or tomorrow. Filing for bankruptcy can be devastating for a household, but it’s really not a huge issue for the economy. In fact, it’s nothing more than a delayed reaction. It tells us what was happening in 2002, not what will be happening in 2004.