While many economic indicators remain shaky, the Equipment Leasing and Finance Foundation (ELFF)’s 2013 U.S. Economic Outlook report, which tracks the most recent trends in important equipment investment, paints an optimistic picture.
The pace of equipment leasing and finance is an important indicator not just because it’s tied to companies’ performance and planning for the future, but because of how widespread it is among U.S. businesses. About 72 percent of U.S. companies use some form of financing to acquire equipment, including loans, leases, and lines of credit. Interestingly, the smaller the company, the less likely it is to use financing. Companies with annual revenue below $1 million use financing in just under half of their equipment acquisitions (49 percent), while companies with revenues between $25 million and $100 million use financing in 86 percent of their acquisitions.
The global recession has had a powerful impact on the behavior of U.S. businesses when it comes to equipment financing. Large companies, those with sales between $25 million and $100 million, doubled their share of financing volume from 2006 — when the ELFF’s first market-sizing study was conducted — to 2011. Companies with fewer than 51 employees also doubled their share of equipment acquisition via financing during the same time period. According to the Foundation, this is likely a reflection of the difficulty in obtaining other forms of credit for these segments of the market during the economic downturn.
The most recent data indicates that 2013 is beginning to look like a “tale of two halves” when it comes to business investment in equipment, according to the ELFF. The foundation said it expects some acceleration in the second half of the year, despite slowdowns in the first and second quarters. It forecasts a 4.8-percent growth in equipment investment this year. By contrast, it predicts that the U.S. economy will see a modest growth rate of 2 percent this year, a number that generally conforms to the economic projections of other analysts.
The research, prepared in partnership with Keybridge Research LLC, notes that the U.S. economy still faces stiff challenges, including high oil prices, weak global growth with much of Europe in recession and China’s economic slow-down, Congressional dysfunction that has triggered the sequester and now a government shut-down, and a looming political fight over the national debt ceiling.
Nonetheless, recent data indicate that the third quarter is shaping up to be more positive, particularly in some key sectors tracked by the ELFF. Although the agricultural equipment and medical imaging sectors are expected to contract or remain stagnant, there is evidence of modest growth in computers and software, industrial equipment and transportation equipment. The most significant growth is beginning to emerge in the construction equipment sector, largely attributed to a recovering housing market.
Other factors pointing to a recovery in the second half of the year include increased economic optimism coupled with improving credit markets that are providing businesses with easier access to credit. The ELFF’s monthly Confidence Index for September shows banking and financial services executives’ overall confidence remaining steady, with 33.3 percent of survey respondents projecting that demand for leases and loans to fund capital expenditures will increase over the next four months, up from 23.5 percent in August’s index.
The growth in investment in industrial equipment is actually quite marked from last year. While this sector grew just 1.9 percent in the fourth quarter of last year, it jumped to 5.2 percent in the first quarter of this year. Growth is expected to accelerate in the second half of the year. The ELFF attributes some of this growth to the “reshoring” of manufacturing operations from abroad as international advantages, such as labor costs, erode. It notes that U.S. manufacturing orders are up 20 percent annually.
“Our Foundation’s Q3 Economic Outlook predicts growth will pick up in the second half of the year due to an improving housing market and auto sales, an energy renaissance, re-shoring of manufacturing, improving credit availability and rising employment,” ELFF President William G. Sutton told IMT.
Sutton also noted that there are other factors driving the growth in equipment leasing and finance, and they are centered on the pace of innovation.
“Managing obsolescence is a strategic benefit of equipment lease finance,” said Sutton. “The risk of owning obsolete equipment (for instance, IT equipment) is eliminated for those who use lease financing for equipment acquisition, since many agreements allow for easy and fast equipment updates.” However, the business decision of lease versus buy is based on a number of factors, including the type of equipment and cash flow requirements, he said.
While the numbers may not be brisk enough for U.S. businesses to break out the champagne yet, barring unforeseen global events, they would appear to reinforce the idea that the recovery is continuing.
