2013 Equipment Investment: The Good News… And Some Bad

• Over the next 12 to 18 months, businesses faced with rising uncertainty over the economy and regulatory policies are expected to be more cautious about spending on equipment and software, as well as taking on more credit. The silver lining to this cloud is that technological innovation and equipment replacement needs should spur rapid growth in volume in late 2014 and beyond.

“The Foundation is delighted to present this essential study, which illustrates that the equipment finance industry is a critical source of funding for U.S. businesses,” said Cameron Krueger, the chairman of the Equipment Leasing & Finance Foundation and the director and National Asset Finance & Leasing Practice leader at Deloitte (New York, NY). “The data provides a fresh and comprehensive picture of the domestic equipment finance sector and how it contributes to the U.S. economy.”

“Equipment financing plays a significant role in helping businesses acquire the equipment they need,” said William G. Sutton, CAE, the president of the Equipment Leasing & Finance Foundation. “The equipment finance sector not only contributes to businesses’ success, but to U.S. economic growth, manufacturing and jobs. This study reveals the importance of resolving political and regulatory uncertainty so businesses can feel more confident about their futures and invest in capital equipment and job creation.”

OTHER KEY FINDINGS
Overall, the U.S. economy continues to exhibit sub-par growth, with expensive oil and continuing policy uncertainty flowing from the fiscal cliff political standoff taking their toll. Although the U.S. economy showed some improvement in the third quarter last year, the slight acceleration of growth was largely due to special factors. Personal consumption remained lackluster, and equipment and software investment fell 2.7 percent (annualized rate) after a 4.8 percent increase in the second quarter.

The new data suggest that businesses essentially “hit the pause button” on investment until there was a resolution to the “fiscal cliff”. The 2013 outlook for equipment and software investment calls for 2.9 percent growth. Relatively weak growth in the first half of the year will be held back by soft demand and fiscal uncertainty – both giving businesses little reason to invest despite generally improving credit conditions.

By the second half of 2013, however, the study expects investment activity to regain momentum thanks to an improving housing sector and relief from policy uncertainty that will have an unlocking effect on business investment.

Financial stress indicators remain subdued as both household and corporate debt levels have held steady, and debt obligation ratios continue to decline. Mortgage rates are at historic lows, spurring housing market activity. Interest rates are likely to remain near historical lows through the first half of 2013, with the potential for moderate upward pressure later in the year. Credit supply and demand will largely stay in balance, and credit markets should continue to slowly thaw over the coming year.

The U.S. economy accelerated in the third quarter of 2012 to an annualized growth rate of 2.7 percent, up from 1.3 percent in Q2 2012. However, much of this growth can be attributed to business inventory increases and extensive federal defense spending – two factors that were likely to dissipate in the fourth quarter.

Exports and investment spending were particularly weak in the third quarter, as the global slowdown has softened demand for U.S.-produced goods, and policy uncertainty has weighed heavily on business confidence. The drought in the Midwest continues to plague the agricultural economy, and Hurricane Sandy is projected to have had an acute negative short-term effect on the Northeast.

Overall, the IHS macro outlook for 2013 is slightly more optimistic than consensus estimates. The macro expects 2.4 percent real GDP growth and for 2.3 percent inflation. The study does expect some fiscal tightening through some spending cuts and the expiration of the payroll tax holiday (together shaving about one percent off of growth for the year). Despite these potential setbacks, there remains optimism from strength in the housing market, the natural gas industry, and the auto sector.

ABOUT THE STUDY
U.S. Equipment Finance Market Study 2012-2013 draws on data from a number of sources, including the Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices, the Federal Reserve Flow of Funds, the 2012 Monitor 100, the Equipment Leasing and Finance Association’s 2012 Survey of Equipment Finance Activity, the IHS Equipment Market Monitor, and surveys conducted by the Foundation.

A key input came from a custom survey of businesses that purchased equipment in 2011. The survey was conducted in August-September of 2012 by IHS on behalf of the Foundation. Responses were collected from 427 businesses, of which 372 acquired business equipment in 2011. For the purposes of the study, equipment financing refers to retail or end-user financing of equipment and software. The financing market estimates reflect lending to businesses and government agencies.

HOW TO ACCESS THE STUDY
The U.S. Equipment Finance Market Study 2012-2013 is available for purchase at www.LeaseFoundation.org. The executive summary and fact sheet are available for free download at http://www.leasefoundation.org/IndRsrcs/MO/USMkts/.

ABOUT THE FOUNDATION
The Equipment Leasing & Finance 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. www.LeaseFoundation.org