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. Suppose that interest rates increase. Illustrate on your diagram and explain.