Cautious Optimism for the Economy

There is no question that the economy has been rebounding in fits and starts over the past 12 months or so. The real issue, however, is whether some of the encouraging numbers and statistics supporting the general optimism that better times are just around the corner are also gaining real traction in the business community. Is that the light at the end of the tunnel or just the guide beacon at the halfway mark? At this point no one can truly claim to know, but for good or bad, expectations often fuel reality. With that in mind, a recent Deloitte survey showing that many business professionals fear a second dip in the economy may prove illustrative.

During a March 2010 Deloitte Webcast, titled “Recession and Recovery: Great Challenges, Greater Opportunity,” more than 1,280 business professionals from the banking and securities, consumer and industrial products, consumer business, energy and resources, financial services, health care providers, health sciences and government, insurance, investment management, life sciences and health care, manufacturing, retail, wholesale, and distribution, technology, media and telecommunications industries responded to online polling questions on economic expectations.

The results of this survey revealed that a vast majority of business professionals (84%) are concerned that there may be a “double dip” in the economy. More than one-quarter (27%) of those polled are very concerned that there may be a “double dip” and more than half (58%) are somewhat concerned.

“Many of our clients are optimistic about the economic recovery but have lingering concerns. They are worried about job growth as well as continued uncertainty within the financial and governmental sectors,” said David Williams, chief executive officer of Deloitte Financial Advisory Services LLP (Deloitte FAS). “The economic growth we experienced at the end of 2009 and the momentum that continues today has resulted in increased optimism; however, until the job picture stabilizes and the credit markets firm up, concerns will remain.”

Nearly one-third (31%) of respondents believe that their company will not fully recover from the recession until after 2011. Only 14% of respondents thought their company would fully recover by the end of 2010.

Almost two-thirds (63%) of respondents think that some cost-cutting measures their company implemented to weather the recession will be enforced during the upturn. Additionally, 19% of those polled responded that all cost-cutting measures implemented during the recession would continue to be enforced during the upturn.

Other Concerns

Financial statement fraud was the most commonly expressed type of fraud risk that respondents said their company would be most concerned about in the next 12 months (23%), while stimulus fraud, Foreign Corrupt Practices Act violations, and money laundering were each noted by 6% of respondents. “Although less than 10 percent of respondents pointed to stimulus fraud as the type of risk their company will be the most concerned about over the next year, the opportunities the stimulus program provides are likely to be accompanied by unprecedented scrutiny of how funds are being disbursed, spent and accounted for. Companies participating in the program will do well to take the government's accountability pronouncements to heart and make a serious commitment to transparency and fraud prevention,” added Greg Swinehart, partner and national leader of forensic and dispute services for Deloitte FAS.

The Equipment Leasing Market

Looking at the actual numbers reported by the equipment leasing and finance industry supports the fears brought to light in the Deloitte survey. The Equipment Leasing and Finance Association's (“ELFA”) Monthly Leasing and Finance Index (MLFI-25), which reports economic activity for the equipment finance sector, shows the same sort of trepidation expressed in the Deloitte survey. Expectations are hopeful, but still cautious.

The MLFI-25 survey showed that new business is up from February to March, but down overall over the past 12 months. Charge-offs are down, but so is employment, and it is continuing to drop. In short, mixed results reflecting an uncertain marketplace.

The Numbers

Specifically, new business volume for March declined 9% when compared with the same period in 2009. When compared with February 2010, however, the MLFI-25 reported new business volume increased by 34%, from $3.2 billion to $4.3 billion. In fact, March originations represent the strongest showing in that category thus far this year.

Delinquencies improved markedly as well. Receivables over 30 days declined sharply to 4.2%, down from 5.7% in February and 4.9% in the year-earlier period. Charge-offs decreased to 1.54%, down from 1.89% in February. Losses have dropped to levels unseen during the past 14 months.

Credit approvals decreased from 69% in February to 68% in March, but are up from 64% in the same period the prior year. Of participating organizations, 62% reported submitting more transactions for approval during the month. Not since September 2008 have a larger percentage of respondents reported putting more transactions through the credit approval process. Finally, employment for equipment finance companies decreased by 2% in the February-March period.

The MLFI-25 is a barometer of the trends in U.S. capital equipment investment. Five components are included in the survey: new business volume (originations), aging of receivables, charge-offs, credit approval ratios, (approved vs. submitted) and head count for the equipment finance business. The MLFI-25 measures monthly commercial equipment lease and loan activity as reported by participating ELFA member equipment finance companies representing a cross section of the equipment finance sector, including small ticket, middle-market, large ticket, bank, captive and independent leasing and finance companies. Based on hard survey data, the responses mirror the economic activity of the broader equipment finance sector and current business conditions nationally.

Adam Schlagman is editor-in-chief of this newsletter.

There is no question that the economy has been rebounding in fits and starts over the past 12 months or so. The real issue, however, is whether some of the encouraging numbers and statistics supporting the general optimism that better times are just around the corner are also gaining real traction in the business community. Is that the light at the end of the tunnel or just the guide beacon at the halfway mark? At this point no one can truly claim to know, but for good or bad, expectations often fuel reality. With that in mind, a recent Deloitte survey showing that many business professionals fear a second dip in the economy may prove illustrative.

During a March 2010 Deloitte Webcast, titled “Recession and Recovery: Great Challenges, Greater Opportunity,” more than 1,280 business professionals from the banking and securities, consumer and industrial products, consumer business, energy and resources, financial services, health care providers, health sciences and government, insurance, investment management, life sciences and health care, manufacturing, retail, wholesale, and distribution, technology, media and telecommunications industries responded to online polling questions on economic expectations.

The results of this survey revealed that a vast majority of business professionals (84%) are concerned that there may be a “double dip” in the economy. More than one-quarter (27%) of those polled are very concerned that there may be a “double dip” and more than half (58%) are somewhat concerned.

“Many of our clients are optimistic about the economic recovery but have lingering concerns. They are worried about job growth as well as continued uncertainty within the financial and governmental sectors,” said David Williams, chief executive officer of Deloitte Financial Advisory Services LLP (Deloitte FAS). “The economic growth we experienced at the end of 2009 and the momentum that continues today has resulted in increased optimism; however, until the job picture stabilizes and the credit markets firm up, concerns will remain.”

Nearly one-third (31%) of respondents believe that their company will not fully recover from the recession until after 2011. Only 14% of respondents thought their company would fully recover by the end of 2010.

Almost two-thirds (63%) of respondents think that some cost-cutting measures their company implemented to weather the recession will be enforced during the upturn. Additionally, 19% of those polled responded that all cost-cutting measures implemented during the recession would continue to be enforced during the upturn.

Other Concerns

Financial statement fraud was the most commonly expressed type of fraud risk that respondents said their company would be most concerned about in the next 12 months (23%), while stimulus fraud, Foreign Corrupt Practices Act violations, and money laundering were each noted by 6% of respondents. “Although less than 10 percent of respondents pointed to stimulus fraud as the type of risk their company will be the most concerned about over the next year, the opportunities the stimulus program provides are likely to be accompanied by unprecedented scrutiny of how funds are being disbursed, spent and accounted for. Companies participating in the program will do well to take the government's accountability pronouncements to heart and make a serious commitment to transparency and fraud prevention,” added Greg Swinehart, partner and national leader of forensic and dispute services for Deloitte FAS.

The Equipment Leasing Market

Looking at the actual numbers reported by the equipment leasing and finance industry supports the fears brought to light in the Deloitte survey. The Equipment Leasing and Finance Association's (“ELFA”) Monthly Leasing and Finance Index (MLFI-25), which reports economic activity for the equipment finance sector, shows the same sort of trepidation expressed in the Deloitte survey. Expectations are hopeful, but still cautious.

The MLFI-25 survey showed that new business is up from February to March, but down overall over the past 12 months. Charge-offs are down, but so is employment, and it is continuing to drop. In short, mixed results reflecting an uncertain marketplace.

The Numbers

Specifically, new business volume for March declined 9% when compared with the same period in 2009. When compared with February 2010, however, the MLFI-25 reported new business volume increased by 34%, from $3.2 billion to $4.3 billion. In fact, March originations represent the strongest showing in that category thus far this year.

Delinquencies improved markedly as well. Receivables over 30 days declined sharply to 4.2%, down from 5.7% in February and 4.9% in the year-earlier period. Charge-offs decreased to 1.54%, down from 1.89% in February. Losses have dropped to levels unseen during the past 14 months.

Credit approvals decreased from 69% in February to 68% in March, but are up from 64% in the same period the prior year. Of participating organizations, 62% reported submitting more transactions for approval during the month. Not since September 2008 have a larger percentage of respondents reported putting more transactions through the credit approval process. Finally, employment for equipment finance companies decreased by 2% in the February-March period.

The MLFI-25 is a barometer of the trends in U.S. capital equipment investment. Five components are included in the survey: new business volume (originations), aging of receivables, charge-offs, credit approval ratios, (approved vs. submitted) and head count for the equipment finance business. The MLFI-25 measures monthly commercial equipment lease and loan activity as reported by participating ELFA member equipment finance companies representing a cross section of the equipment finance sector, including small ticket, middle-market, large ticket, bank, captive and independent leasing and finance companies. Based on hard survey data, the responses mirror the economic activity of the broader equipment finance sector and current business conditions nationally.

Adam Schlagman is editor-in-chief of this newsletter.