04/10/24 09:10 AM EDT

Corporate Debt Growth Falling

Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

Our featured chart today showcases U.S. corporate credit as a percentage of GDP, which currently stands at 48.7%, a significant decrease from the pandemic-induced peak of 60% (driven by GDP recover) even as absolute levels remain near all-time highs. While Corporate Debt to GDP has been rising, the absolute rate of growth of both has decelerated markedly, giving rise to the phenomenon of "Zombie Companies."

This chart might suggest that corporate debt has decreased significantly; however, this isn't quite accurate. The debt has continued to grow, albeit at a reduced rate — it's the relative size compared to a growing GDP that has shifted. In Q3 2023, while federal debt has grown rapidly by 12.7% quarter-over-quarter, corporate debt increased by a mere 1.86%. By Q4, the federal debt was still surging at 10% Q/Q, with corporate debt growing at just 0.8% Q/Q. This slowing rate of private sector debt growth ultimately raises risks that refinancings will be impaired as the highly levered companies (and households) face much higher interest rates. Corporate debt growth has structurally fallen below nominal GDP for only a few brief periods in history, and those periods tend to represent deep recessions and their aftermath (as losses in corporate debt reduce the total quantity). With the Fed having hiked rates dramatically over the last three years and yet nominal GDP growth rate remaining low in absolute terms, a significant move lower carries meaningful risk.