Downgraded: Industry Growth Forecast For 2016

According to Ralph Petta, president of the Foundation and president and CEO of the Equipment Leasing and Finance Association (ELFA), “sluggish growth in equipment and software investment projected over the short term by this latest Foundation analysis is indicative of the slowdown in business fixed investment reported by federal government data over the past several quarters. The equipment finance sector generally mirrors overall performance of the U.S. economy. A number of factors, both domestic and externally focused, cloud the growth picture for the equipment finance industry, and this slow-growth scenario, in all likelihood, will continue for the rest of the year as many ELFA members report soft business conditions.”

The Foundation's report, which is focused on the $1 trillion equipment leasing and finance industry, highlights key trends in equipment investment and places them in the context of the broader U.S. economic climate. The Q3 report is the second update to the 2016 Annual Outlook, and will be followed by one more quarterly update before the publication of the 2017 Annual Outlook in December.

Key Findings

Equipment and software investment is now expected to increase by just 0.9% this year, a significant dropoff from last year's 3.8% growth. Equipment and software investment contracted significantly in the first quarter of 2016, and although investment should rebound somewhat in the months ahead, the poor first quarter performance will limit overall investment growth for the year.

Supported by mostly decent fundamentals, the U.S. economy is forecast to expand 2.2% in 2016, slightly slower than the pace of growth over the past two years. Consumer spending, driven by increases in real disposable income, will be a significant driver of growth in 2016, and tighter labor markets and solid residential housing gains are primed to provide an extra boost. Weaknesses in the manufacturing and energy sectors, however, are ongoing impediments to growth and will likely persist for the rest of the year.

Thus far in 2016, predictions of an economic “pivot” from 2015 have proven to be accurate: Manufacturing and exports have transitioned from growth drivers to drags, while consumption and housing activity continue to strengthen. Other limiting factors include the uncertainties posed by the results of the Brexit referendum, a trend of declining global trade and a persistently strong dollar, which are expected to continue to hurt U.S. market confidence and slow economic growth.

Global uncertainty is weighing on credit demand and supply, but U.S. credit conditions remain at generally healthy levels. While financial stress has fallen and consumer demand for credit has increased considerably, uncertainty in the world economy and financial markets is contributing to weak business confidence and sluggish business investment. The Federal Reserve has made several decisions to delay interest rate hikes, citing global headwinds. The Fed is expected to raise interest rates later this year, however, which may pull forward some investment and slightly expand 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 forecasts that investment in most verticals is likely to remain relatively weak through the end of the year. Over the next three to six months:

• Agriculture Machinery investment growth should remain weak.
• Construction Machinery investment growth will likely remain sluggish.
• Materials Handling Equipment investment should grow slowly.
• All Other Industrial Equipment investment growth is likely to weaken.
• Medical Equipment investment should grow modestly.
• Mining & Oilfield Machinery investment growth will likely remain negative.
• Aircraft investment growth may remain weak, although growth is historically volatile.
• Ships & Boats investment growth will likely slow.
• Railroad Equipment investment growth is likely to remain negative.
• Trucks investment growth should be subdued, but a turnaround may be on the horizon.
• Computers investment growth is likely to grow modestly.
• Software investment growth is poised to remain solid.

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 full report can be accessed at http://bit.ly/1O2GlVI.