Greater Investments by Businesses Despite Rise in Interest Rates

American companies are getting ready to reinvest after years of hoarding money. What is surprising is that northward interest rates are not going to stop them. In December, the Federal Reserve gave the sign that interest rates may rise at a quicker pace that what was originally envisaged. The United States economy is now much better and the Feds have confidently given approval to the decade’s second rate increase.

A number of large American corporations, despite many years of almost zero interest rates which made borrowing much cheaper, have been squirreling money or hoarding cash into safer shores after the recession. A few like CSX Corp. and General Motors borrowed to use in shoring up pension plans. Other companies like Yum Brands and Home Depot utilized cheap debt to buy back shares. Total spending on upgradation of aging equipment or building new factories did not see much investment.

New opportunities

This scenario is going to change soon. According to Charles Mulford of Georgia Institute of Technology, Atlanta, American companies could expect a considerable rise of capital expenditures. This renewed optimism means that the United States is ready to emerge from the frustrating business patters which have stymied growth for a long time. This is standard during times of downturn. Businesses generally slash their capital investment. This includes spending which improves physical assets like computers, buildings and equipment. With the picking of the economy, the companies increase their spends. If they do not, there will be a risk of being overtaken by bolder competitors.

Company executives are now emboldened by the incoming Trump administration and Republican majority in Congress. They anticipate corporate tax breaks and regulatory rollbacks. Greater infrastructure spending is also foreseen.

Shareholder disapproval

The time of financial crisis saw business investment go on a down swing. It fell approximately 17 percent for the Standard & Poor 500 companies withing a year post the September 2008 Lehman’ Brothers collapse. According to data extracted from the Standard & Poor Dow Jones Indices, even with the recovery of the economy, it took three years to take expenditures to pre-crisis level. There was another reason as to why companies did not invest. Corporate leaders have resisted the hurdle rate- defined as minimum return rate on the investments made- they will accept from the new spending. This was probably due to fear of shareholder disapproval. The common logic is that investment should be stopped in case there are lower returns and an unchanged hurdle rate.

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