NEW YORK, Nov 1: The US economy may be growing at its fastest pace in nearly 20 years, but a backlog of debt on corporate balance sheets could limit the upside of a nascent capital spending boom, some economists say.

In key industries such as telecommunications and many manufacturing sectors, companies could put their credit ratings in jeopardy if they ramp up spending on business investment, according to rating agencies.

The majority of corporations could afford to increase capital spending, but there remain important exceptions, said John Lonski, chief economist for Moody’s Investors Service. You’re still at a point where incomplete repair of corporate balance sheets necessarily limits upside potential for capital spending.

The US Commerce Department reported on Thursday that gross domestic product rose at a 7.2 per cent annualized pace in the third quarter, the fastest growth since 1984. An 11 per cent surge in business investment was especially encouraging, as capital spending is viewed as key to putting the US recovery on firmer ground.

Still, rating agencies warn that balance sheets remain fragile in many sectors of the economy because companies are still digging out from debt amassed in the last business cycle. That could keep a lid on future investment, they say.

Even with an improving economy and even with earnings coming back very strongly, there are still a fair number of firms that are squeezed, said David Wyss, chief economist for Standard & Poor’s.

This is actually a fairly typical pattern, Wyss added. Companies try to contract, cut down on capital spending and do everything they can to get through a recession, but they don’t have the financial strength or capacity to expand again when the economy picks up.

Although companies slowed their pace of borrowing sharply last year, debt began growing robustly again in the second quarter of this year, the latest quarter for which data is available. Nonfinancial corporate debt grew at a rate of 6.3 per cent in the April-June quarter, up from 2.8 per cent in the first quarter, according to the Federal Reserve.

Total nonfinancial corporate debt stood at $4.98 trillion in June, up from $4.91 trillion at the end of the first quarter this year.

What should be happening is that as the stock market goes up, companies should be issuing new stock to repay debt, said Jane D’Arista, director of programs at research firm Financial Markets Center. They’re not doing it.

Companies may be able to handle their debt now because interest rates are low and foreign investors are buying US assets, including corporate debt, D’Arista said, but those supports may be temporary.

This debt expansion was financed by the foreign sector; it is not being financed by US savings, said D’Arista. This is not sustainable over the long haul.

In a sign of how cumbersome debt remains, rating downgrades this year are exceeding upgrades by about 2.35-to-one, according to Moody’s, although that is a big improvement from a five-to-one ratio last year.

Ratings erosion slowed as companies improved their cash balances and lowered interest costs by refinancing debt at lower rates. Still, downgrades are likely to exceed upgrades for at least another year, according to Moody’s Lonski.

The economy is doing better, but lagging far behind is the manufacturing sector, and a recovery by employment has yet to materialize, Lonski said. There still are macro risks out there.—Reuters