U.S. companies are preparing to invest again after years on the sidelines, and rising interest rates are unlikely to impede them.
Executives have grown more optimistic about growth, in part anticipating that President-elect Donald Trump’s administration and Republican congressional majorities will bring regulatory rollbacks, corporate tax breaks and increased infrastructure spending.
The Federal Reserve last month signaled interest rates would rise at a faster pace than previously projected, showing increasing optimism about the U.S. economy as it unanimously approved its second rate increase in a decade.
Despite years of near-zero interest rates that made borrowing cheap, many big U.S. corporations have been hoarding cash or plowing money into safer pursuits in the wake of the recession. Some, like General Motors Co. and railroad CSX Corp., borrowed to prop up pension plans. Others, including Home Depot Inc. and Yum Brands Inc., used cheap debt to repurchase shares. Meanwhile, overall spending on building new factories or upgrading aging equipment languished.
That is likely to change soon.
“We could be in store for a significant [capital-expenditure] boom,” said Charles Mulford, an accounting professor at Georgia Institute of Technology in Atlanta.
In 2010, videogame retailer GameStop Corp. committed to spend $300 million on share repurchases and $200 million on new stores and other investments. The company had built up cash on its balance sheet and executives felt they needed to return some to shareholders in the absence of better alternatives. “The interest-rate environment wasn’t giving you anything for parked cash,” said Robert Lloyd, GameStop’s finance chief.
More recently, the company has shifted tactics. GameStop has boosted capital spending to roughly $160 million in 2016 from $125 million in 2013 for store refurbishments and expansion into new categories like collectibles. Last year, it cut its buyback in half.