No constraints to financing growth.

CONTRARY TO COMMON perceptions, U.S. non-financial corporations do not appear over-leveraged when judged by the debt-to-equity ratio. Since the 1990 recession, corporations have lowered their leverage ratios in response to both a stronger and more global equity market. There are both cyclical and

secular influences on the debt-to-equity ratio. On the secular side, investor interest in equities has improved over the last 20 years and this has been particularly true for global investors. Meanwhile, on the cyclical side, debt-to-equity ratios do peak during periods of recession as equity values fall sharply. In contrast, as equity values rise during economic expansions, the debt-to-equity ratio declines. At this phase of the cycle, debt does not appear to be an obstacle to economic growth.

Over the last four years, non-financial corporations have drastically reduced their use of short-term debt relative to long-term debt. This is especially true compared with earlier business cycles. Therefore, firms are less sensitive to both the availability and price of short-term credit. As a result, private firms are in a better position to withstand a "credit crunch," like the one that prompted the 1990-1991 recession.

Surveys of lenders, such as the Fed's Senior Loan Officer Survey, do not suggest that a move to restrain credit is in the works. Meanwhile, the Federal Reserve does not appear to be in a position to raise the benchmark federal funds rate. In sum, neither the supply nor price of credit is likely to lead to a credit shock and, therefore, a constraint on financing economic growth.

Capital expenditures remain modest compared to internally generated funds for non-financial firms. Capital spending has moderated in recent months as business investment has slowed from 9% in 2005 to 7% in 2006. We estimate investment growth of 4% during the first hall of 2007. Meanwhile, non-financial corporate profit growth fell from an annual rate of 33% in 2004 to 17% in 2005, but remained at a still solid 18% rate during the first three quarters of this year.

At this point of the economic expansion, there does not appear to be any financial constraint to continued economic growth. Our outlook does not include a recession, and the financial state of nonfinancial firms supports our outlook.

JOHN SILVIA

Chief Economist, Wachovia Corp., and a former member of the ABA Economic Advisory Committee