Is Corporate Debt Pointing to a Recession?
Economy

Is Corporate Debt Pointing to a Recession?

iStockphoto/The Fiscal Times

A measure of corporate debt levels is reaching worrisome levels, says Joseph Lavorgna, chief economist at the investment bank Natixis. In a note to clients Tuesday, Lavorgna said that the ratio of non-financial corporate debt to nominal GDP growth has risen above 45 for the last few quarters, roughly the same level reached before the last two recessions (see the chart below, with recessions marked by shaded areas).

While this doesn’t mean that recession is necessarily imminent, it does suggest that when the economy turns, “it is likely to come from the corporate sector whose balance sheet is relatively stretched compared to history,” Lavorgna wrote. Household debt, by comparison, is in much better shape.

One of the main drivers of elevated corporate debt levels is interest rates, which have remained low even as the economy hits what appears to be a cyclical peak. When a recession does come, it will likely be shallow, Lavorgna says, due to the relative strength of consumer balance sheets. At the same time, however, the recovery could also be weak due in part to the recent massive increases in the budget deficit, which could limit the ability of policymakers to respond with fiscal stimulus.