Is recession coming? What 'FRED' chart on US corporate borrowing suggests

Federal Reserve Economic Data (FRED) is a database maintained and updated by the research division of the “Federal Reserve Bank” of St. Louis. A chart by FRED shows the amount of "corporate debt outstanding" by the non-financial companies in the USA. The total US debt by Q4 2022 stood at $12.7 trillion, which is almost $1.6 trillion more than the pre-Covid levels of Q1 2020. As per the data, total outstanding US corporate debt is almost 50% of American GDP, which stands at $26 trillion, which is larger than what was seen during the dot-com bubble and 2008 financial crisis.

Interestingly, whenever this graph has flattened or says the borrowing by the corporate has slowed down, there has been a recession, mild or severe, depending on the severity of the crisis. The graph had also gone down during the 2008 financial crisis when recession hit the US. Before that, the graph flattened after the 1999 crash. In 1990 also the curve had gone down when the Gulf War broke out and oil prices skyrocketed, causing a slow growth in borrowing, almost pushing US to the brink of recession. Now in 2023, this graph is again flattening, indicating the de-leveraging of the debt or less borrowing by the corporates.

Burcu Hacibedel, a senior economist in the strategy policy and review department of the International Monetary Fund wrote in a blog on IMF.org that, “After a sharp rise in 2020-21, international debt issuance by non-financial companies fell by $136 billion in the year to June 2022, as firms found it costlier to access finance." She meant that in a rising interest rate environment, the borrowing becomes costlier. Adding to this, she also wrote, “Further tightening of global financial conditions would increase the risks faced by both advanced and emerging economies. Spillover from corporate distress could include slower economic growth, rising unemployment, pressure on vulnerable household, volatile asset prices and a spike in non-performing loans at financial institutions.”

Last year, Institute of International Finance said that global debt passed $300 trillion in 2021. This covered borrowing by governments, business and households. IMF also warned that the data is at dangerously high levels and countries need to work together to tackle this debt mountain in order to safeguard global stability and prosperity. “In the end, the impact will be most sharply felt by those households that can least afford it.”, IMF added.