In its latest economic outlook, the Equipment Leasing & Finance Foundation acknowledges the substantial uncertainty stemming from the epidemiology of COVID-19 and the U.S. economic response.
Besides details on equipment and software investment and capital investment, the second quarter 2020 report includes information on three key trends relating to the virus impact:
- Consumer spending collapse
- Small business sector health
- Government stimulus
Equipment verticals: contraction ahead of outbreak
Equipment and software contracted 0.8% (annualized) in Q4 2019, marking the second consecutive quarterly contraction ahead of the COVID outbreak.
Of the 12 verticals tracked by the Foundation, seven experienced negative investment growth in Q4, including three that posted double-digit declines (construction, materials handling and other industrial.) Of the five verticals that experienced positive annualized growth, mining and oilfield, aircraft and computers fared the best.
"Though momentum in a handful of verticals is accelerating, this is mostly because relevant economic indicators do not yet reflect the unprecedented pace of the pandemic’s economic damage," the report says.
Transportation and manufacturing verticals are likely to plummet in the months ahead, as well as mining and oilfield equipment due to rock-bottom oil prices. However, there will clearly be a strong demand for medical equipment, the report says, and work-from-home policies may provide a buffer for computers - and potentially software.
Consumer financial stress likely to rise
Prior to COVID, consumers were reasonably well-positioned to handle normal economic fluctuations. The labor market, however, was losing steam.
Consumer debt in Q4 was near the lowest level on record, leaving consumers on solid footing prior to the outbreak. Credit card delinquencies rose to a four-year high during the quarter but remained well below recession-era levels.
Also, after peaking above 4% year-over-year growth in mid-2018, real disposable personal income growth had decelerated and fallen to early 2017 rates before the pandemic ushered in widespread job loss.
"In light of these trends, it is not surprising that consumers appear to have been tightening their belts prior to COVID," the report says.
In the second half of March, 10 million people lost their jobs and many millions more are likely to follow. These consumers will be less able to make credit card, mortgage and auto loan payments, putting stress on both the U.S. economy and the financial sector businesses lending to these borrowers.
The CARES Act, which provides enhanced unemployment insurance and direct cash payments for low- and middle-income households, should help mitigate some of the damage, although more federal support will likely be necessary, the report says.
Virus hits service industry hardest
The service sector has been severely impacted by COVID in recent weeks, as evidenced by the IHS Markit Non-Manufacturing PMI plummeting to an all-time low in March. More than 90% of the U.S. population was under stay-at-home orders, which shuttered non-essential businesses across the country and caused economic catastrophe. These included tourism and hospitality, restaurants, travel, oil, and personal services.
Government mitigation takes several forms
In anticipation of economic and public health effects from coronavirus, Congress passed three bipartisan relief packages in March. The first two bills funded vaccine development, paid sick leave for most employees, and free coronavirus testing. The third bill (the CARES Act) provides $2.3 trillion in fiscal stimulus to consumers, businesses, and states.
At the state and local government levels, unemployment claims rose sharply in March and were expected to increase further. This was expected to cause a drawdown of unemployment trust funds that could surpass 2008-09 recession levels, widespread business closures and reductions in sales tax collections, and reductions in state services and planned investments.
To get the report's full details—including credit conditions, key financial indicators and accompanying charts and appendices—visit here: