Equipment Financing: Guarded But Growing

These bankers and finance executives report that confidence in the U.S. economy and the capital markets – which drives more consumer goods, equipment and durables, and investments – remains strong for the next four months. But an underlying uncertainty is the reason that forecasts remain guarded.

Confidence in the U.S. economy and the capital markets is a critical driver to the equipment finance industry. Throughout history, when confidence increases, consumers and businesses are more apt to acquire more consumer goods, equipment and durables, and invest at prevailing prices. When confidence decreases, spending and risk-taking tend to fall. Investors are said to be confident when the news about the future is good and stock prices are rising.

To monitor these economic trends, the Equipment Leasing & Finance Foundation (the Foundation; Washington, DC) released its July 2011 Monthly Confidence Index for the Equipment Finance Industry (MCI-EFI), an index that collects leadership data and reports a qualitative assessment of both the prevailing business conditions and expectations for the future as reported by key executives from the $521 billion equipment finance sector.

Overall, the July report states that confidence in the equipment finance market is 56.2, up 6.8 percent from the June index of 52.6.

When asked about the outlook for the future, survey respondent Paul Menzel, the president and CEO of Financial Pacific Leasing, LLC (Federal Way, WA), said, “We continue to wait for the micro and small business segment of the economy to pick up. Consumers continue to lack confidence in the economy and are debt averse and/or de-leveraging their balance sheets. The political gridlock on the deficit is a threat to this already fragile recovery.” He added that this uncertainty is the reason for a guarded forecast.

The survey results of the overall MCI-EFI index is 56.2, an increase from the June index of 52.6:

• When asked to assess their business conditions over the next four months, 14 percent of executives responding said they believe business conditions will improve over the next four months, an increase from 5.0 percent in June. 81.4 percent of respondents believe business conditions will remain the same over the next four months, an increase from 79.5 percent in June. 4.7 percent of executives believe business conditions will worsen, a decrease from 15.4 percent in June.

• 14 percent of survey respondents believe demand for leases and loans to fund capital expenditures (capex) will increase over the next four months, an increase from 12.8 percent in June. 74.4 percent believe demand will “remain the same” during the same four-month time period, a decrease from 77 percent the previous month. 11.6 percent believe demand will decline, up from 10 percent who believed so in June.

• 23 percent of executives expect more access to capital to fund equipment acquisitions over the next four months, flat from June. 76.7 percent of survey respondents indicate they expect the “same” access to capital to fund business, also flat with the previous month. In the last eight months’ surveys, no one responded that they expect “less” access to capital.

• When asked, 32.6 percent of the executives reported they expect to hire more employees over the next four months, down from 33.3 percent in June. 58 percent expect no change in headcount over the next four months, an increase from 53.8 percent last month, while 9.6 percent expect fewer employees, a decrease from 12.8 percent in June.

• 72 percent of the leadership evaluate the current U.S. economy as “fair,” up from 66.7 percent who did in June. 27.9 percent rate it as “poor,” down from 33.3 percent last month.

• 9.3 percent of survey respondents believe that U.S. economic conditions will get “better” over the next six months, up from 5.0 percent in June. 79 percent of survey respondents indicate they believe the U.S. economy will “stay the same” over the next six months, down from 82 percent in June. 11.6 percent responded that they believe economic conditions in the U.S. will worsen over the next six months, down from 12.8 percent who believed so last month.

• In July, 44.2 percent of respondents indicate they believe their company will increase spending on business development activities during the next six months, up from 28 percent in June. 55.8 percent believe there will be “no change” in business development spending, down from 69 percent last month, and no one believes there will be a decrease in spending, down from 2.6 percent who believed so last month.

Depending on the market segment they represent, executives that were surveyed have differing points of view on the current and future outlook for the industry:

Bank, Large Ticket
“Based on the current activity level and backlog, I am upbeat about the new origination activity for 2011.” –  Anonymous executive with a large ticket bank

Bank, Middle Ticket
“Like most businesses, we are concerned about the current inability of the executive and legislative branches of the Federal Government to strike a deal on raising the U.S. debt ceiling.  This stalemate is impacting confidence in both a near-term economic recovery and improving demand for new equipment financing.” – Adam Warner, President, Key Equipment Finance (Superior, CO)

Independent, Middle Ticket
“There are slow signs of recovery. We are having more dialogue with customers in regard to their budgets and upcoming opportunities, but the decision making process is still cautionary.” – Aylin Cankardes, President, President, Rockwell Financial Group (Centennial, CO)

The respondents in the MCI-EFI are comprised of a wide cross-section of industry executives, including large-ticket, middle-market and small-ticket banks, independents and captive equipment finance companies. The MCI-EFI uses the same pool of 50 organization leaders to respond monthly to ensure the survey’s integrity. Since the same organizations provide the data from month-to-month, the results constitute a consistent barometer of the industry’s confidence.

The survey consists of seven questions and an area for comments that asks the respondents’ opinions about the following:
1)  Current business conditions
2)  Expected product demand over the next four months
3)  Access to capital over the next four months
4)  Future employment conditions
5)  Evaluation of the current U.S. economy
6)  U.S. economic conditions over the next six months
7)  Business development spending expectations

The survey concludes with an open-ended question for comment and personal insights.

The Foundation is a 501c3 non-profit organization that provides vision for the equipment leasing and finance industry through future-focused information and research. Primarily funded through donations, the Foundation is the only organization dedicated to future-oriented, in-depth, independent research for the leasing industry.

Equipment Leasing and Finance Foundation, 1825 K Street NW, Suite 900, Washington, DC 20006, 202-238-3400, 202-238-3401, www.leasefoundation.org.