NCPA - National Center for Policy Analysis

Business Investing Continues Heady Growth

January 25, 1999

Despite the fact that recessions abroad have hit U.S. manufacturers' sales, businesses here are still investing at a fast clip, experts say.

  • Capacity rates here have been expanding rapidly -- while factory operating rates have fallen below 80 percent for the first time in five years.
  • And real business investment outlays have been up nearly 9 percent on a year-to-year basis, according to the Commerce Department's latest figures.
  • At the same time, management's focus on stock-market performance is said to be inspiring a huge wave of stock buybacks -- pushing net repurchases of corporate equity to a record $158 billion in the past year.
  • Net borrowing by business surged by 72 percent in the 12 months ending in September.

What's unusual, says John M. Youngdahl of Goldman Sachs & Co., is that companies are spending capital and making stock buybacks in the face of growing internal financial constraints and record business borrowing.

In the wake of weakening profits and pricing power, cash flow is up a mere 0.5 percent over its year-earlier level. So companies are borrowing to finance the buybacks. That wouldn't be unusual when stock prices are low. But valuations today are extraordinarily high, economists note.

Source: Gene Koretz, "Capital Outlays Vs. Buybacks," Business Week, February 1, 1999.


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