Despite the deceleration in Q4 2013, the U.S. economy still expanded 3.4% in the second half of 2013, relative to 1.8% in the first, suggesting that economic fundamentals are solidifying. In particular, consumer spending and exports were strong in Q4. Looking forward, a budget agreement and reduced policy uncertainty from Washington could help the economy to break out from its "start-stop" growth pattern.
A severely cold winter slowed a variety of economic indicators from home sales to nonfarm payroll growth, and may trim 1.0% off GDP growth in the first quarter. However, positive cyclical forces continue to shift towards the pro-growth direction. The sustainable housing market recovery, low natural gas prices, robust auto sales, record high household wealth, steadily improving credit availability, and employment gains all point to a year stronger growth and the possibility of "break out" growth close to 3.0%. However, downside risks from adverse weather in Q1 2014, high oil prices, soft patches in international growth, and political wild cards during an election year remain potential headwinds.
Overall, we expect the U.S. economy to grow 2.8% in 2014, the fastest pace since the 2008-09 recession.
Growth in equipment and software investment accelerated from a 2.2% annualized rate in Q3 2013 to 8.9% in Q4. Looking ahead, we expect modest sector growth for the coming year, with an overall forecast of 4.2% growth in 2014.
- Agriculture Machinery investment will likely see slow growth in the first half of 2014 as both farm yields and commodity prices ease.
- Construction Machinery investment will see stronger growth later in the year, but the year-over-year growth figures will appear weak due to a high base year effect.
- Materials Handling Equipment investment will experience slightly stronger growth over the next 3 to 6 months.
- All Other Industrial Equipment investment will likely see moderate growth over the next 3 to 6 months as the manufacturing sector's competitiveness improves.
- Medical Equipment investment will grow, but at a more moderate pace than the second half of 2013.
- Mining & Oilfield Machinery is currently decelerating, but looks to rebound later in the year.
- Aircraft investment will likely slow after a strong Q4, and growth will be about average for the year.
- Ships & Boats investment will likely continue at a below-average pace over the next year.
- Railroad Equipment investment will improve from its recent contraction towards modest growth.
- Investment in Trucks will exhibit high-single digit growth over the next 3 to 6 months as economic activity improves and diesel prices remain competitive.
- Computers investment will be muted in the next 3 to 6 months after strong replacement demand over the past few quarters.
- Software investment will be moderate in the next 3 to 6 months as companies focus on upgrading to new technology.
Credit market conditions remain highly accommodative, and the Federal Reserve will continue to implement a two-pronged policy agenda in 2014. First, the Fed will take "measured steps" in its tapering of monthly asset purchases, unless economic conditions materially change – which sets the program to end in late 2014. Secondly, the Fed has now reevaluated its guidance on short term interest rates and zero interest rate policy. With the unemployment rate near the 6.5% "threshold", the FOMC has now moved towards a more "qualitative guidance", focusing on a number of economic indicators in order to assess the proper path of zero interest rate policy. However, there is internal pressure from FOMC members who want to tighten monetary conditions, citing financial market imbalances. If economic data show an accelerating trend over the course of 2014, it is very possible that the Fed could be forced to advance its decision in maintaining its zero interest rate policy. Because interest rates will remain low by historical standards, rising rates may have only a marginal impact on the lease-versus-buy decision. However, the changing rate environment could impact the equipment leasing industry in other ways, for example, through net interest margin compression.