HOW WILL SKYROCKETING DEBT AFFECT COMPANIES’ FUTURES? – Only the Zombies Know for Sure

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by Dave Allen, The International Forecaster:

Less Americans getting infected, more Americans getting vaccinated, $6 trillion in government spending, with at least $4 trillion more on the table, and many trillions more from an anything-goes Fed.

What do they have in common? They’re all converging to create what giddy economists and others, like Axios’ Nicholas Johnston, say will be “a year of U.S. economic growth for the record books.”

With those kind of numbers (think 10 zeros!), it better be record-setting!

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Less Americans getting infected, more Americans getting vaccinated, $6 trillion in government spending, with at least $4 trillion more on the table, and many trillions more from an anything-goes Fed.

What do they have in common? They’re all converging to create what giddy economists and others, like Axios’ Nicholas Johnston, say will be “a year of U.S. economic growth for the record books.”

With those kind of numbers (think 10 zeros!), it better be record-setting!

Yesterday, we learned that 1st quarter GDP increased at an annualized rate of 6.4%.

Consumers, who account for 68% of the economy, accelerated spending by 10.7% in the quarter, compared with a 2.3% increase in last year’s 4th quarter.

The latest numbers reflect an economy that has made major strides since the 2020 lockdowns that sent more than 22 million American workers to the unemployment line.

It also saw GDP plunge an historic 31.4% in the 2nd quarter. That was followed by a rebound of 33.4% in the 3rd.

However, the National Bureau of Economic Research has not declared an end to the recession, because GDP in total dollars has not passed its previous peak.

And while about 14 million Americans have returned to their jobs since then, the Fed estimates that 8.4 million less of us have jobs now than before the pandemic.

Forecasts for 2021 growth are now even more exuberant than they were just a few months ago.

Too big to fail Goldman Sachs forecasts 7+% growth this year, a pace, if it comes to fruition, not seen in over three decades.

The bank says that hopes of an economic rebound are changing from “from forecast to fact.” Hmm, that’s a tad premature, don’t you think? Why don’t we wait several more months to see how everything plays out?

Another factor that economists are pointing to as a sign of a coming boom is the record 87% of S&P 500 companies that have beat earnings estimates in the 1st quarter, with earnings looking to be growing by more than 46%.

Just remember, all of these earnings reports are being measured against last year’s 1st quarter, just as the pandemic shutdowns of the pandemic began.

And these gains are happening during reopenings that are extremely difficult to forecast.So, who knows what awaits? The point is we need to be cautious and circumspect and not fall victim to blind optimism.

COMPANIES IN CRISIS GOING DEEPER INTO DEBT

Plus, not every company is on the way back. One of the 13% of companies that didn’t meet 1st quarter estimates — Boeing — reported its sixth consecutive quarterly loss this week, to the tune of $3.4 billion.

The plane manufacturer is one of several companies that borrowed heavily from the capital markets last year, even as the pandemic caused its revenue — and ability to pay interest — to dwindle.

Piling on new debt helped them survive the crisis at hand. But borrowing through the recession now puts a lot of them at risk of becoming Zombie companies that can operate but can’t pay off their debts or invest in growth.

As Axios reports, a slew of high-yield companies have added billions more in debt during the pandemic, in some cases increasing their balances by more than half.

And many of them — particularly, cruise and airlines — may not see earnings fully rebound any time soon.

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