Higher Interest Rates Are Giving Businesses An Unexpected Boost, For Now

Higher Interest Rates Are Giving Businesses An Unexpected Boost, For Now
Paul Allison, CFA

4 months ago1 min

Sky-high interest rates haven’t shaken the US economy in exactly the way you might’ve expected. A still-strong job market, pandemic-era household savings, and locked-in, 30-year mortgages are helping to keep consumer spending strong. And that’s keeping businesses somewhat bubble-wrapped against the impact of those rate rises too – for now at least.

This chart looks at how higher interest rates usually play out for businesses. It shows net interest expenses – that’s the interest cost on a firm’s debt minus any earned from cash in the bank – for non-financial companies in the US (red line). Remarkably, the measure is at 60-year lows – and that’s despite the rocketing interest rates (black line). Now, only the most credit-worthy firms can lock in interest rates for 30 years, but most can nail down a low rate for five or ten. So before rates started marching higher, savvy companies would’ve done that.

But, it’s not all a bed of roses. Eventually medium- and long-term debt will need refinancing, and if interest rates stay high, that’ll be more costly for firms. There’s also the fact that building interest-earning cash piles or paying off expensive debt is a cash drain, and it means other stuff – like share buybacks, dividends, acquisitions, or just growth expansion – might have to be sacrificed. A lack of spending on all those things could hurt future profit growth.

But for now, though, some smart balance sheet management has not only softened the blow of a higher rate environment, but has also turned it into an advantage.



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