Stock prices are also down for the year, and combined with increases in interest rates, can produce reductions in capital spending. Investment spending has been a major factor sustaining the expansion both directly and by raising productivity. Corporate debt is at record levels and firms are defaulting on their interest payments at the highest rate in over a decade. An economic slowdown will exacerbate this problem and cause further reductions in capital spending. There is still reason to be optimistic.
Corporate profits remain strong.
One estimate is that pretax profits will increase by 15.2 percent, almost double the 1999 rate. Forecasts for next year call for a 6.8 percent increase. In spite of recent stock price movements, earnings have been growing and, consequently, cash flow is estimated to increase by 11.8 percent this year. Most economists believe that profits and cash flow are the primary determinants of capital spending. Capital spending, they argue, will slow but not plunge.