Equipment Investment Expected to Stabilize or Improve in Second Half of 2012

On the plus side for 2012, notwithstanding an external shock, the United States is poised for growth driven by an improving housing market, a growing manufacturing sector and pent-up demand in the consumer and business sectors. Lower oil prices should also help support growth during the second half of the year. The initial projection for 2013 growth in equipment and software investment is 8%.

Trends in Equipment Investment

Among the various sectors, the trends show:

• Agriculture equipment investment is likely to decelerate in the next three to six months.
• Computers and software equipment investment should remain healthy, but is likely to slowdown somewhat.
• Construction equipment investment is projected to continue to grow at a strong pace as the housing market rebounds.
• Industrial equipment investment likely grew at a below-average pace in Q2 2012, but could pick up by late 2012 or early 2013.
• Medical equipment is likely to be relatively flat on a year-year basis.
• Transportation equipment investment should remain solidly positive, but is unlikely to maintain the rapid growth rates of 2011.

Credit Markets

The Q3 Outlook considered that credit market conditions have stabilized after fears of Greece exiting the EU caused tensions to spike. In addition, the subsequent flight to safety by investors pushed long-term U.S. Treasury rates to all-time lows. However, with long-term interest rates still near historical lows, the benefits of additional monetary easing are likely to be marginal. As economic conditions slowly improve, demand for business loans will continue to grow, and supply constraints for large businesses should ease further, although small businesses are reportedly having some difficulties in accessing capital. Conditions remain favorable for purchasing versus leasing, as the cost of borrowing is near record lows. The baseline assumption of the Q3 Outlook is that Europe will continue to muddle through its economic crisis, causing global demand for U.S. Treasuries to moderate. As a result, tensions in global credit markets will ease somewhat, and U.S. interest rates should marginally increase by the end of 2012.

The U.S. Economy

The U.S. economy slowed in the first quarter of 2012 to an annualized growth rate of 1.9%, down from 3% in the fourth quarter of 2011. High oil prices have hampered economic growth for more than a year ' after prices peaked in March, job creation slowed significantly, while real disposable income has been relatively flat and retail sales contracted in April and May. Although oil prices have dropped sharply, it will take several months for these lower prices to translate into higher consumer spending.

Conclusion

Overall, the macro outlook for 2012 has not changed materially. Real GDP growth is forecast at 2.2%, down from the previous forecast of 2.3%, and inflation expectations dropped from 2.4% to 2.3%. Nevertheless, the Q3 Outlook reasoned that shifts in risks should be a net positive for the United States. Pent-up consumer demand, along with a rebounding housing market, will be the main growth drivers over the next six to 12 months. Subsequently, the analysts' first look at 2013 calls for average annual growth of 2.8%.

A full copy of the report may be accessed at www.leasefoundation.org/IndRsrcs/EO/.

The Equipment Leasing & Finance Foundation has released the quarterly update to its 2012 Equipment Leasing & Finance U.S. Economic Outlook. The report, prepared in partnership with the economics and public policy consulting firm Keybridge Research, forecasts equipment investment and capital spending in the United States and evaluates the effects of various related and outside factors in play currently and into the foreseeable future. According to the Q3 Outlook, the projected growth in equipment and software investment for 2012 has slowed to 6.4% down from the previous projection of 6.9%. The recent slowdown in economic activity indicates that equipment investment continued to lose momentum in Q2, but forward-looking indicators suggest growth will stabilize and potentially improve in the second half of the year.

Key Findings

The Q3 Outlook showed that investment for the balance of 2012 is expected to grow, but at a slower rate than previous quarters. The European crisis, the slowdown in emerging markets, and regulatory and political uncertainty remain the potential obstacles.

On the plus side for 2012, notwithstanding an external shock, the United States is poised for growth driven by an improving housing market, a growing manufacturing sector and pent-up demand in the consumer and business sectors. Lower oil prices should also help support growth during the second half of the year. The initial projection for 2013 growth in equipment and software investment is 8%.

Trends in Equipment Investment

Among the various sectors, the trends show:

• Agriculture equipment investment is likely to decelerate in the next three to six months.
• Computers and software equipment investment should remain healthy, but is likely to slowdown somewhat.
• Construction equipment investment is projected to continue to grow at a strong pace as the housing market rebounds.
• Industrial equipment investment likely grew at a below-average pace in Q2 2012, but could pick up by late 2012 or early 2013.
• Medical equipment is likely to be relatively flat on a year-year basis.
• Transportation equipment investment should remain solidly positive, but is unlikely to maintain the rapid growth rates of 2011.

Credit Markets

The Q3 Outlook considered that credit market conditions have stabilized after fears of Greece exiting the EU caused tensions to spike. In addition, the subsequent flight to safety by investors pushed long-term U.S. Treasury rates to all-time lows. However, with long-term interest rates still near historical lows, the benefits of additional monetary easing are likely to be marginal. As economic conditions slowly improve, demand for business loans will continue to grow, and supply constraints for large businesses should ease further, although small businesses are reportedly having some difficulties in accessing capital. Conditions remain favorable for purchasing versus leasing, as the cost of borrowing is near record lows. The baseline assumption of the Q3 Outlook is that Europe will continue to muddle through its economic crisis, causing global demand for U.S. Treasuries to moderate. As a result, tensions in global credit markets will ease somewhat, and U.S. interest rates should marginally increase by the end of 2012.

The U.S. Economy

The U.S. economy slowed in the first quarter of 2012 to an annualized growth rate of 1.9%, down from 3% in the fourth quarter of 2011. High oil prices have hampered economic growth for more than a year ' after prices peaked in March, job creation slowed significantly, while real disposable income has been relatively flat and retail sales contracted in April and May. Although oil prices have dropped sharply, it will take several months for these lower prices to translate into higher consumer spending.

Conclusion

Overall, the macro outlook for 2012 has not changed materially. Real GDP growth is forecast at 2.2%, down from the previous forecast of 2.3%, and inflation expectations dropped from 2.4% to 2.3%. Nevertheless, the Q3 Outlook reasoned that shifts in risks should be a net positive for the United States. Pent-up consumer demand, along with a rebounding housing market, will be the main growth drivers over the next six to 12 months. Subsequently, the analysts' first look at 2013 calls for average annual growth of 2.8%.

A full copy of the report may be accessed at www.leasefoundation.org/IndRsrcs/EO/.