Research

2016 Equipment Leasing & Finance U.S. Economic Outlook

This comprehensive report analyzes global and domestic trends impacting capital spending and economic growth in the coming year. It identifies key signposts specific to the equipment finance industry and features Momentum Monitors that identify turning points for 12 verticals in their respective investment cycles. The outlooks are updated quarterly.

2016 Economic Outlook

Summary:

Equipment & Software Investment Outlook:

Moderate equipment and software investment growth is likely to continue in 2016, as persistent headwinds curb business spending. Specifically, a weak global economy and low commodity prices limited business investment last year and will remain obstacles to stronger growth in 2016. We expect equipment and software investment to expand 2.7% this year, somewhat slower than the 3.8% growth rate in 2015. Many equipment and software verticals are poised to moderate in coming months, yet pockets of solid growth can be found in others:
  • Agriculture Machinery investment growth should remain generally weak over the next three to six months.
  • Construction Machinery investment growth will likely slow further over the next three to six months.
  • Materials Handling Equipment investment growth should remain weak over the next three to six months.
  • All Other Industrial Equipment investment growth is likely to slow over the next three to six months.
  • Medical Equipment investment growth is expected to remain solid over the next three to six months.
  • Mining & Oilfield Machinery investment growth should stay weak over the near term.
  • Aircraft investment growth may slow over the next three to six months, although growth is historically volatile.
  • Ships & Boats investment growth could moderate in the next three to six months.
  • Railroad Equipment investment growth is likely to remain strongly negative over the next three to six months.
  • Trucks investment growth could slow over the next three to six months.
  • Computers investment growth is likely to strengthen moderately over the next three to six months.
  • Software investment growth is poised to remain solid over the next three to six months.

U.S. Capital Investment & Credit Markets: Global uncertainty is weighing on credit demand and supply, although U.S. credit conditions remain at generally healthy levels. Despite a recent uptick in financial stress, we see little evidence of major financial risks in 2016. Turbulence in the world economy and financial markets has invited greater caution from businesses and consumers, yet both firms and households are expected to gradually increase their borrowing as these headwinds slowly fade. Acknowledging increased risks from abroad, the Fed held interest rates unchanged this spring. However, the Fed remains prepared to slowly raise rates this year, which may pull forward some investment and slightly expand margins for equipment finance firms.

Overview of the U.S. Economy: Driven by solid fundamentals, we expect the U.S. economy to expand 2.3% 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. Weakness in the manufacturing and energy sectors is likely to persist, and a soft global economy (particularly China) will hurt U.S. exports. The economic "pivot" which began in 2015 will continue this year: manufacturing, energy, and exports have flipped from growth drivers to drags, while other previously-lagging sectors are now fueling economic expansion.

Bottom Line for the Equipment Finance Sector:

Equipment and software investment is likely to expand modestly in 2016, as continued global headwinds limit business confidence and spending (particularly in the manufacturing and export sectors). Reflecting soft business investment, activity in equipment leasing and finance may moderate somewhat this year. However, solid fundamentals — including consumer spending and service sector strength — point to positive economic expansion in 2016, and the U.S. economy is expected to weather a slowdown in the global economy. Overall, we project 2.3% GDP growth in 2016, while equipment and software investment growth is likely to slow to around 2.7%.

Independent, forward-looking research for the equipment finance industry.