| BUSINESSWEEK ONLINE : NOVEMBER 22, 1999 ISSUE | ||||||||
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| CORPORATE SCOREBOARD
Damn the Interest Rates, Full Speed Ahead In May, when Federal Reserve policymakers first signaled that they were leaning toward raising interest rates, investors gasped. U.S. central bankers hadn't hiked short-term rates in more than two years. The economy was cruising along on a path of strong growth and low inflation. And productivity gains were zooming. Was this the beginning of the end of the boom times for U.S. corporations? No way. Even though the Fed has since followed through, raising the interbank rate by half a percentage point, to 5.25%, business has thrived. And companies have yet to cut back on expansion plans. Most economists doubt they will do so anytime soon, and expect the resulting productivity gains to filter through to corporate bottom lines. That means the incredible stretch of strong earnings Corporate America has experienced of late should continue well into next year. SPENDING SPREE. One reason rising rates haven't hurt corporate profits is that executives aren't focusing just on borrowing costs. Instead, says Claude K. Amadeo, an analyst at Bridgewater Associates in Westport, Conn., they're also thinking about potential returns. And considering how much growth technology investments are generating, the recent rise in borrowing costs looks ''minuscule,'' Amadeo says. The improved earnings companies stand to make from their investments still top the costs. That's because companies are still getting a healthy return on the billions of dollars they're pouring into online networks, software, and other productivity-enhancing technology. The amount that companies spend on equipment and software has nearly doubled in the past five years, to an annual rate of $1.01 trillion, says the Commerce Dept. Meanwhile, U.S. productivity growth rose at an annual rate of 2.6% from 1996 through 1998--well above the 1.6% pace in the 1980s. Of course, at some point the returns from higher spending will no longer outweigh the costs, and as margins get squeezed, companies will start to pull back. But Jon A. Boscia, chief executive of Lincoln Financial Group, a Philadelphia money manager, thinks interest rates would have to climb much higher before that happens. Rates on long-term Treasury bonds, for example, would have to rise from their current level of about 6% to well above 8%, he estimates. So while the Fed's hikes have also pushed up interest rates on corporate debt, the impact on overall borrowing has been mild. Corporate-debt issuance totaled about $29 billion in October, the lowest monthly total for the year and down from $31 billion in October '98. But that's still a historically high level. And a lot of borrowing was front-loaded into the third quarter because of Y2K-related computer concerns. In any case, economists expect little letup in the investment boom--or the strong profits it has spurred. The National Association for Business Economics expects spending to rise by 9% this year and 7% next year. That bodes well for earnings. Ezra D. Greenberg, senior economist at Standard & Poor's DRI in Lexington, Mass, expects fourth-quarter pretax profits to grow about 25%. ''The better productivity is, the more likely that we'll get continued strength in profits,'' he says. In other words: Damn the interest rates, full speed ahead. By Laura Cohn in Washington, with Amy Barrett in Philadelphia _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS Corporate Profits: What a Difference a Year Makes CHART: Aftertax Profits Quarter by Quarter A Spotlight On Third-Quarter Profits CHART: Change in Aftertax Profits from 1998 TABLE: The Quarter's Winners and Losers Damn the Interest Rates, Full Speed Ahead CHART: So Far, No Slowdown in Capital Spending Third Quarter 1999 Corporate Scoreboard (.pdf) INTERACT E-Mail to Business Week Online | |||
