2013 Equipment Investment: The Good News… And Some Bad

The good news is that the plant, equipment and software investments will surpass $740 billion in 2013. The bad news is that lingering uncertainty regarding important tax and regulatory decisions could still hamper business investment in the near term.

U.S. businesses and government agencies will finance more than $742 billion in equipment acquisitions in 2013, according to the U.S. Equipment Finance Market Study 2012-2013, released recently by the Equipment Leasing & Finance Foundation (Washington, DC).

The study, conducted by IHS Inc. (Englewood, CO), provides a comprehensive look at the size and expected growth of the U.S. equipment finance market. According to the study the equipment finance sector has emerged from the Great Recession with finance volumes at an all-time high as a result of double-digit growth in equipment investment and a favorable interest rate environment.

However, equipment finance volumes are expected to expand at a more moderate pace over the next 12 to 18 months as equipment investment growth remains constrained by uncertainties at home and abroad. Companies are expected to remain cautious about taking on the risks associated with large capital investments until after important tax and regulatory decisions impacting short- and long-term fiscal stability have been made.

Some equipment sectors will remain subdued for the beginning of 2013 (note: growth rates are expressed on a year-year basis):

• Agriculture equipment investment is likely to continue to contract in Q1 2013.
• Computers & Software equipment investment is projected to stagnate for the next three to six months.
• Construction equipment investment is projected to average strong growth (about 15 percent) as the housing market continues to improve.
• Industrial equipment investment will grow but at a slower rate than recent quarters. Depending on the outcome of the fiscal cliff debate, manufacturing could drive stronger growth in the second half of 2013.
• Medical equipment investment growth is likely to range between minus two percent and two percent in the next three to six months.
• Growth in Transportation equipment investment is likely to moderate, averaging about ten percent over the next three to six months.

Other highlights from the market study include:

• Last year equipment finance volume returned to pre-recession levels, with the 2012 estimate for the equipment finance market expected to reach $725 billion. The market is expected to expand over the next two years; however, the growth rate is expected to slow.

• The equipment finance sector is a significant contributor to capital formation in the U.S.economy. Of the projected $1.3 trillion invested in plant, equipment and software in 2013, 55 percent, or $742 billion, of that investment is expected to be financed through loans, leases and lines of credit. In 2014, the market size is projected to grow to $778 billion.

• Seventy-two percent of companies use some form of financing when acquiring equipment, including loans, leases and lines of credit (excluding credit cards). Companies with less than $1 million in revenues use financing in 49 percent of their equipment acquisitions, while companies with revenues between $25 million and $100 million use financing in 86 percent of their acquisitions.

• Companies with sales between $25 million and $100 million doubled their share of financing volume from 2006—when the Foundation’s first market-sizing study was conducted―to 2011. Companies with fewer than 51 employees also doubled their share equipment acquisition via financing in this time period. This may be in part a reflection of the difficulty in obtaining other forms of credit for these segments of the market.

• Cash as a method of purchasing declined for large companies from 2007 to 2012 as larger companies enjoyed greater access to credit markets.  In the current low-interest-rate environment, financing equipment acquisitions is especially attractive.

• Corporate perceptions of the economic outlook are the primary driver behind equipment investment decisions. When presented with a list of potential factors that will drive future investment spending, companies surveyed by the Foundation overwhelmingly chose “general economic conditions.” The financing decisions of smaller companies are especially sensitive to general economic conditions.

• Even with the relatively high degree of uncertainty over the economy and regulations/fiscal policy, nearly 30 percent of companies surveyed anticipated increasing their equipment investment over the next 12 months. This group of companies is disproportionately represented by large companies. For example, among companies with sales over $100 million, 51 percent indicate they would increase spending, yet only 17 percent of businesses with sales less than $1 million have similar plans.