Higher Interest Rates Could Impact Big Corporations

According to Goldman Sachs, big corporations may soon feel the impact of higher interest rates. With approximately $1.8 trillion of U.S. corporate debt set to mature in the next two years, companies could be forced to tighten their belts, potentially leading to job cuts and other cost-saving measures.

To refinance their existing debt at current higher rates, corporations would face increased debt costs. Goldman Sachs’ economics team, headed by Jan Hatzius, projects a 2% rise in interest expenses for corporations in 2024 and a significant 5.5% jump in 2025, as stated in a recent client note. Historical analysis of public companies’ data since 1965 reveals that higher interest payments often result in reductions in labor and capital expenditure.

For every additional dollar of interest expense, firms typically decrease their capital expenditures by 10 cents and labor costs by 20 cents. This reduction in labor costs stems from both decreased employment and lower wages. The Goldman Sachs team predicts that this could potentially generate a drag of 5,000 jobs on monthly payroll growth in 2024 and a further 10,000 jobs in 2025.

To gain a clearer picture of the overall debt landscape, the Goldman Sachs team has been monitoring a wave of corporate debt maturities from this year until 2030. Like homeowners, many large U.S. businesses took advantage of the low interest rates during the pandemic to secure fixed-rate loans and shield themselves from the Federal Reserve’s recent rate increases. However, as companies tend to stagger their debt maturities to minimize borrowing costs, a substantial amount of debt will come due between now and 2026.

Fed Officials Expect Rates to Stay Higher for Longer

Despite the anticipation of rate cuts next spring, Federal Reserve officials are expecting rates to remain higher for a longer period of time.

Labor Market Strength

One of the factors contributing to this expectation is the surprisingly resilient labor market, which has kept inflation elevated and the economy thriving. Despite concerns that the Fed’s rapid rate hikes would lead to a recession, the economy added 187,000 jobs in July. While hiring appears to be slowing, wages have remained steady at a rate of 4.4% annually, and unemployment has dropped to 3.5% from 3.6%. Federal officials are aiming for yearly wage gains of 3% or less.

Growing Confidence in a Soft Landing

Confidence in a “soft landing” for the economy has been growing, despite emerging cracks in credit markets. Borrowers with floating-rate debt are facing particular challenges, as evidenced by the $25 billion in leveraged loan defaults this year, which could make 2023 the third worst year in history for such defaults. This trend was further highlighted by trucking company Yellow Corp. filing for Chapter 11 protection, citing “bullying” by Teamsters. The company had previously received a $700 million pandemic bailout from the government when it was known as YRC Worldwide Inc.

Market Response

Despite these concerns, stock markets saw a rise on Monday. The Dow Jones Industrial Average, S&P 500 index, and Nasdaq Composite Index rebounded from last week’s weakness after Treasury yields reached new highs for 2023.

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