U.S. Economic Outlook

Report Summary - Equipment & Software Investment Outlook

Equipment and Software Investment: E&S investment growth has cooled in the opening months of 2023 as the combined effects of a slowing industrial sector and higher interest rates weigh on equipment demand. Though certain end use markets may avoid the worst effects of the looming recession, we expect that the economic downturn will drag on investment across the board.

Momentum Monitor: The latest Momentum Monitor reading points to a slowing economy. Transportation-related sectors, including Ships & Boats and Railroad Equipment, are especially vulnerable in the coming quarters given that consumer and industrial activity are likely to cool.

Manufacturing: The manufacturing sector has worked through much of its pandemic-era supply chain backlogs, and broad measures of activity suggest that the sector is in the midst of a protracted slowdown. However, it is important to keep in mind that the jumping-off point for the current slowdown is a place of strength. As such, while demand is likely to continue to soften   this year, the expected downturn may not be as severe as in past cycles.

Small Businesses: Main Street businesses were particularly exposed to pandemic-era labor shortages, and labor-saving investments in equipment and technology continue to be a lifeline. However, loan availability is expected to decrease this year, making it more difficult to finance investments and putting upward pressure on Main Street financial stress.

Fed Policy: The Fed has continued to demonstrate its commitment to bringing inflation to heel after initially being “behind the curve” — including raising rates by 25 bps despite a string of  bank failures. The Fed still has its work cut out to bring inflation closer to its 2% target, and for this reason we still expect rates to rise higher than most market-implied forecasts.

U.S. Economy: Growth softened in Q1, and we expect this trend to continue through the year.  The labor market remains healthy and lower energy prices are benefitting U.S. consumers, but inflation is proving to be stickier than many expected. Further, despite supply chain improvements and slower price growth in recent months, we believe the balance of inflation risks tilts to the upside. Elsewhere, trends in credit card and auto loan debt suggest that consumer financial stress is rising, and a looming debt ceiling showdown will do little to soothe the turmoil in the financial sector.

While a soft landing scenario is still achievable, we continue to believe that a mild recession wil occur in 2023, likely beginning during the second half of the year.