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Despite a debt buildup in the late 1990s, the U.S. corporate sector overall is in good financial health, according to New York Fed senior economist Carol Osler and assistant economist Gijoon Hong.
Osler and Hong explain that the outstanding debt of nonfinancial corporations rose 46 percent from the beginning of 1995 through year-end 1999.
The rapid growth in debt raises questions about the nonfinancial corporate sectors soundness and its vulnerability to economic downturns. In general, heavily indebted firms have greater difficulty servicing their debt during a downturn--a problem that could perpetuate an economic decline and affect the productivity of the firms and the nation.
With these concerns in mind, Osler and Hong examine the nonfinancial corporate sector on a firm-by-firm basis, focusing on three key measures of health: leverage, liquidity, and overall solvency. They find that:
The sector as a whole is in good financial shape; in fact, its health has improved from the beginning of 1995 through the third quarter of 1999.
Some weakness does exist among the sectors smallest firms.
The sector would likely withstand a major stock market correction without a severe disruption. However, a large rise in interest rates could bring the sectors liquidity risk back to the relatively high levels of the 1980s.