Q2 economic outlook forecasts 2.7% growth In equipment and software investment in 2016Monday, April 11, 2016
Investment in equipment and software is expected to grow 2.7 percent in 2016, according to the Q2 update to the 2016 Equipment Leasing & Finance U.S. Economic Outlook released by the Equipment Leasing & Finance Foundation. The Foundation lowered its 2016 equipment and software investment forecast to 2.7 percent, down from 4.4 percent growth forecast in its 2016 Annual Outlook released in December 2015. The report predicts that equipment and software investment will expand modestly in 2016, as persistent headwinds—particularly a weak global economy and low commodity prices—curb business confidence and spending. 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 report will be updated quarterly throughout 2016.
Ralph Petta, President of the Foundation and President and CEO of the Equipment Leasing and Finance Association, said, “Growth in the volume of financed equipment slowed over the last quarter, reflecting a similar moderate growth pattern in overall equipment and software investment. Low oil prices and weak global demand appear to be largely responsible for business owners’ cautious approach to capital spending. Also, anecdotal and other data point to a slight erosion of portfolio quality, with delinquencies and losses ticking upward.”
Highlights from the study include:
• Driven by solid fundamentals, the U.S. economy is expected to grow by a moderate 2.3 percent 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 percent in 2016, somewhat slower than 2015’s 3.8 percent growth rate. Equipment and software investment declined at a 1.2 percent annual rate in the fourth quarter of 2015, a sharp deceleration from 7.2 percent 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.
• 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:
o Agriculture machinery investment growth should remain generally weak over the next three to six months.
o Construction machinery investment growth will likely slow further over the next three to six months.
o Materials handling equipment investment growth should remain weak over the next three to six months.
o All other industrial equipment investment growth is likely to slow over the next three to six months.
o Medical equipment investment growth is expected to remain solid over the next three to six months.
o Mining & oilfield machinery investment growth should stay weak over the near term.
o Aircraft investment growth may slow over the next three to six months, although growth is historically volatile.
o Ships & boats investment growth could moderate in the next three to six months.
o Railroad equipment investment growth is likely to remain strongly negative over the next three to six months.
o Trucks investment growth could slow over the next three to six months.
o Computers investment growth is likely to strengthen moderately over the next three to six months.
o 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.
Download the full report at www.leasefoundation.org/research/eo/.
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