In 2013, the U.S. economy managed not just to survive a series of shocks—the fiscal cliff, the sequester, tax increases, the government shutdown, the advent of the Affordable Care Act—but to power through them. As we speak, the U.S. is closing out its 54th month of growth, and the headline growth numbers are as good as they’ve been in years. The stock market is at a record high.
This confluence of events remains something of a mystery. The U.S. is a consumer-driven economy, but consumer confidence remains at recessionary levels and wages have hardly budged. Companies are hoarding cash. The Federal Reserve has continued to support the economy with unprecedented levels of bond-buying but with diminishing returns. And government continues to weigh on the economy.
There is one overlooked factor that can help explain the comparative buoyancy of the U.S. economy: the decline of financial failure.
Financial failure comes in many forms: the shuttering of banks, defaults on mortgages, credit-card charge-offs, corporate and personal bankruptcies, and mass lay-offs. Each is damaging as an event on its own. But, like rocks tossed into lakes, their impacts cause larger ripples. Because the American financial system piles debt upon debt, one small financial failure can lead to a larger number of financial failures. Because humans are, well, human, they tend to react to failures around them by becoming more financially conservative—even if their own livelihood isn’t in danger. Put another way, failure is pro—cylical—a company going bankrupt fires a worker, who defaults on a mortgage, which causes a sharp decline in value on a mortgage-backed security, which can help push a bank toward insolvency. And that’s part of the reason the recession of 2008-2009 was so deep and harsh. Failure begot failure.
But the forces work in the other direction. For the reasons cited above, success (or a mere decline in failure) can lead to further success (or further declines in financial failure.) And to a large degree, this was the story of 2013.
Fewer companies failed this year than in previous years. Corporate bankruptcies in the third quarter of 2013 (PDF), at 8,119, were down 12.2 percent from the third quarter of 2012. In fiscal year 2013, which ended in September, corporate filings were down 17 percent from the year before—and down 42 percent from fiscal 2009. Yes, companies continue to restructure, revamp, and rightsize, often in very public ways. Through the first 11 months, large companies publicly announced 478,428 job cuts, according to Challenger, Gray & Christmas. But that’s down 2.5 percent from the first 11 months of 2012. Overall, there was generally a lot less firing in 2013 than in 2012. As a result, the weekly pace of first-time unemployment claims declined over the course of the year. In the second half of 2013, on a seasonally adjusted basis, about 330,000 Americans experienced the trauma and psychological blow of filing for unemployment benefits each week. In the second half of 2012, about 380,000 Americans did so.
Because the financial system piles debt upon debt, one small failure can lead to a larger number of failures.
Declining separations combined with modest growth in hiring meant that the U.S.—especially the private sector—added about 2 million jobs in the first 11 months of 2013. And the fact that more people were successful at finding jobs, or holding on to jobs they already had, meant that significantly fewer consumers experienced financial failure. In fiscal 2013, personal bankruptcy filings—at 1.072 million—were down 12 percent from fiscal 2012, and off 30 percent from 2010 Americans did a much better job keeping up with their mortgages, too. In the third quarter of 2013, only 6.41 percent of all residential mortgage loans were delinquent—down from 6.99 percent in the second quarter of 2013 and down from 7.40 percent in the third quarter of 2012. Americans haven’t had this much success staying current on their mortgages since the spring of 2008. Consumers are doing even better when it comes to staying on top of their credit card debt. According to TransUnion, this summer, credit card delinquency rates fell to a 20-year low.
The virtuous cycle continues. The decline of corporate failure leads to a decline in consumer failure, which, in turn, leads to a decline in financial-institution failure. In 2013, the Federal Deposit Insurance Corporation closed a mere 24 failed banks—down sharply from 51 in 2012, and off 83 percent from 140 in the plague year of 2009. Banks may not be lending like they were at the height of the credit bubble. But they’re not failing, and they are in extremely good health.
Now, the decline of failure, in and of itself, is not enough to power the economy to greater heights. It’s a necessary condition, but not a sufficient one. For the current economic cycle to rival its predecessors in length, companies will have to stop hoarding cash and start investing it and raising pay for workers, while government will have to regain the courage to spend and hire. Let’s hope those are the stories of 2014.