- They were once American corporate giants, well-known brands, and successful cases in business classrooms.
- Fed Chairman Powell said that it was too early to stop the Fed's emergency lending facility.
- The debt of zombie companies increased by nearly $1 trillion, bringing the total debt to $1.36 trillion.
Bloomberg analyzed the financial data of the 3,000 largest publicly listed companies in the United States and found that since the start of the pandemic, nearly 200 companies have joined the ranks of so-called zombie companies. Moreover, zombie companies now account for nearly 20% of these 3,000 companies.
Even more shocking is that during this period, the debt of zombie companies increased by nearly $1 trillion, bringing the total debt to $1.36 trillion. In contrast, during the most severe period of the financial crisis, the total debt of zombie companies was only about $500 billion.
They were once American corporate giants, well-known brands, and successful cases in business classrooms. But now, they look more and more like zombies, and their numbers are constantly expanding.
From Boeing, Carnival, Delta Air Lines , to Exxon Mobil and Macy’s, the income of many of the most iconic companies in the United States is not enough to cover interest expenses. This is the key criterion for some market experts to define zombie companies. The huge debt will have a profound impact on the US economic recovery.
The Fed ’s purchase of corporate bonds to avoid a large number of corporate bankruptcies may have helped avoid an economic depression. However, economists have pointed out that helping hundreds of troubled companies to obtain virtually unrestricted credit opportunities may inadvertently lead to capital flow to companies with low production efficiency.
This may inhibit employment and economic growth for many years to come. Torsten Slok, Chief Economist of Apollo Global Management said:
“We have come to the point that we should ask, ‘what are the unintended consequences?’ . . . The Fed, for stability reasons, decided to step in. They knew they were going to create zombies. Now the question becomes, ‘what about the companies that have been kept alive that otherwise would have gone out of business?”‘
Fed Chairman Jerome Powell expressed cautious optimism about this, saying that the US economic recovery may continue to maintain a “steady” pace. However, it may also lose momentum as the number of new coronavirus infections surges. He added that it was too early to stop the Fed’s emergency lending facility.
Powell said at an online event hosted by the Bay Area Council on Tuesday that the increase in infection rates poses a “significant” downside risk, “especially in the near term.”
Although the non-agricultural employment in the United States has rebounded for six consecutive months, the number of new coronavirus infections has surged again, which may curb economic activity and slow the pace of economic recovery.
However, the hope of the success of the new coronavirus vaccine boosted the stock market to a record high last week.
Chairman Powell said that the recent progress in vaccine research and development is good news in the medium term, but there is still a long way to go before the US economy fully recovers from the new coronavirus epidemic. He tends to keep the Fed’s emergency loan facility for the time being. Except for one, these tools will expire at the end of this year.
However, Sen. Pat Toomey (R-PA) urged the Fed to stop these tools because market functions have resumed operation. The Fed needs to obtain the approval of the Secretary of the Treasury to continue to retain these tools.
A spokesman for the Treasury Department said that Secretary Steven Mnuchin has not yet decided whether to extend these tools until next year.
The U.S. retail sales growth rate announced on Tuesday night fell to the lowest in six months, indicating that Americans may become more cautious. The weakening of consumer spending means that economic growth may slow down.
As hopes for a new round of fiscal stimulus measures fade this year, Fed officials may discuss whether to increase monetary stimulus measures next month to maintain economic growth.