Although a recession in the next six months appears unlikely, business conditions for the equipment finance industry are also unlikely to improve materially over the rest of the year, particularly for equipment verticals that serve the manufacturing sector, according to the Q4 Equipment Leasing & Finance U.S. Economic Outlook recently published by the Equipment Leasing & Finance Foundation.
Equipment and software investment growth decelerated for the second consecutive quarter in Q2 but remained positive, primarily due to moderate annualized growth in software (equipment investment was essentially flat), the report says.
Outlook weakens for most equipment verticals
The Outlook includes the Foundation-Keybridge U.S. Equipment & Software Investment Momentum Monitors, which are custom leading indicators for 12 equipment and software verticals.
It shows over the next three to six months:
- Agricultural Machinery investment growth (Y/Y) should improve;
- Construction Machinery investment growth (Y/Y) is likely to grow at a moderate pace;
- Materials Handling Equipment investment growth (Y/Y) will likely remain weak;
- All Other Industrial Equipment investment growth (Y/Y) is likely to remain modest;
- Medical Equipment investment growth (Y/Y) should strengthen;
- Mining & Oilfield Machinery investment growth (Y/Y) is likely to remain weak;
- Aircraft investment growth (Y/Y) is likely to remain negative;
- Ships & Boats investment growth (Y/Y) should remain weak;
- Railroad Equipment investment growth (Y/Y) is likely to weaken;
- Trucks investment (Y/Y) is expected to remain positive;
- Computers investment growth (Y/Y) will likely continue to weaken; and,
- Software investment growth (Y/Y) should continue expanding at a moderate pace.
Consumer confidence, trade war impact trends
One way to view economic shifts is to categorize them as tailwinds (favorable) and headwinds (unfavorable). The report highlights these pressures amidst an uneven 2019 U.S. economic performance, while noting expansion should continue through at least the rest of the year. Overall, the Outlook projects the U.S. economy will grow at an annualized rate of 2.2% in 2019, which is slower than the July estimate of 2.5%.
Economic tailwinds - Consumer debt levels remain manageable relative to disposable income and both delinquencies and defaults are at or near historical lows. Coupled with elevated consumer confidence, consumers powered the economy forward in the second quarter — a trend that should continue over the rest of the year.
Economic headwinds - The trade war between the U.S. and China has contributed to a notable global economic slowdown concentrated in the manufacturing sectors of several key trading partners, a development that has contributed to reduced business confidence.
Factors to watch
The outlook for the remainder of 2019 hinges on several factors, with the balance tilted toward the downside. The biggest unknown is the U.S. conflict with China, which has expanded to fronts beyond trade. Domestically, encouraging data from the U.S. housing market could be evidence that it is finally emerging from its protracted slump, but the labor market, while still strong, has shown some signs of softening. Finally, financial markets have continued to reach new record highs, but there are several external risk factors that could trigger a substantial decline — which, if realized, would likely harm consumer confidence and spending.
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