Economic Growth in U.S Leaves World Behind Link: https://www.wsj.com/articles/st

Question

Economic Growth in U.S Leaves World Behind

Link: https://www.wsj.com/articles/strong-spending-data-shows-u-s-economy-chugging-ahead-of-europe-and-asia-1528994914

The U.S economy appears to be picking up steam as Europe and the other major economies are slowing down. AS a result of the economic growth in the U.S the Federal Reserve increased interest rates a quarter of a percent in June and the Euro lost 1.88% against the U.S Dollar, the biggest drop since the U.K departed the European Union. Recent U.S Data has shown the economy grew 2.2% over the winter and currently growth is on track to exceed 4% for the second quarter, the fast of any quarter in 4 years. U.S spending increased as consumers spent more on cars, clothing, building suppliers, health products, and entertainment. Low unemployment, strong consumer spending, and modest inflation are likely to keep the economy strong for the remainder of 2018.

Questions:

How will the economic growth of the economy affect long term investment decisions for U.S Companies?

Are companies more or less likely to increase their risk tolerance related to capital budgeting with the expected increase in cash flows from consumer spending?

Explanation / Answer

a)

US economic growth is stronger and it will continue to grow in future as well. High growth rate, low inflation coupled with positive consumption sentiments would increase prospective profits of firms in USA. Hence, most of firms who have enough resources would make investments in US.

But these firms find more profits investment elsewhere, then there may not be let up in investment activities in USA.

b)

Capital budgeting refers to the investment in long term project where returns spread over stream of payments. Demand is high in economy, so profits would be high in long run. thus, investors would be ready to take up greater level of risk.

Hence, companies are likely to take greater level of risk.

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