Industry Growth Forecast

Driven by solid fundamentals, the U.S. economy is expected to grow by a moderate 2.3% in 2016, roughly in line with the pace of growth over the past two years. Continued gains in the labor market and income, along with service sector strength, should drive growth this year. Weaknesses in the manufacturing and energy sectors are likely to persist, and combined with a soft global economy (particularly China's), these factors are expected to hurt U.S. exports.

Equipment and software investment is expected to expand a modest 2.7% in 2016, somewhat slower than 2015's 3.8% growth rate. Equipment and software investment declined at a 1.2% annual rate in the fourth quarter of 2015, a sharp deceleration from 7.2% growth in Q3. This contraction provides a weak “jumping-off point” for investment and will likely hold back annual growth.

Recent turbulence in the world economy and financial markets has invited greater caution from businesses and consumers, and financial stress has ticked up in 2016. However, there is little evidence of major financial risks in 2016 and both consumers and businesses are expected to gradually increase their borrowing as headwinds fade. The Fed remains prepared to slowly raise rates this year, which may pull forward some investment and relieve some of the pressure on margins for equipment finance firms.

Twelve Verticals

The Foundation-Keybridge U.S. Equipment & Software Investment Momentum Monitor, which is included in the report, tracks 12 equipment and software investment verticals. Many equipment and software verticals are poised to moderate in coming months, yet pockets of solid growth can be found in others:

• Agriculture machinery investment growth should remain generally weak over the next three to six months.
• Construction machinery investment growth will likely slow further over the next three to six months.
• Materials handling equipment investment growth should remain weak over the next three to six months.
• All other industrial equipment investment growth is likely to slow over the next three to six months.
• Medical equipment investment growth is expected to remain solid over the next three to six months.
• Mining & oilfield machinery investment growth should stay weak over the near term.
• Aircraft investment growth may slow over the next three to six months, although growth is historically volatile.
• Ships & boats investment growth could moderate in the next three to six months.
• Railroad equipment investment growth is likely to remain strongly negative over the next three to six months.
• Trucks investment growth could slow over the next three to six months.
• Computers investment growth is likely to strengthen moderately over the next three to six months.
• Software investment growth is poised to remain solid over the next three to six months.

The Foundation produces the Equipment Leasing & Finance U.S. Economic Outlook report in partnership with economic and public policy consulting firm Keybridge Research. The annual economic forecast provides a three-to-six month outlook for industry investment with data, including a summary of investment trends in key equipment markets, credit market conditions, the U.S. macroeconomic outlook and key economic indicators. The Q2 report is the first update to the 2016 Annual Outlook, and will be followed by two more quarterly updates before the publication of the 2017 Annual Outlook in December. The full report can be accessed at tinyurl.com/mn8mfs4.

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