The U.S. economy accelerated in 2018, posting two of the strongest quarters of growth since the recession and approaching 3% growth on the year, however recent trends and uncertainties make it likely to soften in 2019, according to the 2019 Equipment Leasing & Finance Industry Snapshot.
Gross Domestic Product
Consumer spending and private inventories were the strongest drivers of growth in the third quarter, adding nearly 2.5 percentage points to GDP, bolstered by healthy consumer spending and investment, explains the snapshot report by the Equipment Leasing & Finance Foundation with Keybridge Public Policy Economics.
Tailwinds
A strong labor market and healthy consumer spending formed economic tailwinds that may move the industry forward. Despite a multi-decade low unemployment rate of 3.7%, the U.S. economy has added jobs at a rapid rate of 203,000 per month through November - well above the 2017 average of 182,000 jobs per month. These job gains will likely moderate next year as the labor market tightens further. Unemployment claims may continue to rise, but the U.S. labor market is currently at one of the healthiest points in recent history and should remain solid throughout 2019, the report says.
Meanwhile, consumer spending is contributing to the recent surge in U.S. economic growth, growing 3.8% and 3.6% in Q2 and Q3, respectively. Spending has been buoyed by recent tax cuts, a healthy labor market and record-high consumer confidence. Overall, recent data suggest consumer spending should remain solid in 2019, according to the snapshot.
Headwinds
Trade policy conflicts between the United States and China escalated further over the last quarter and recent actions have increased uncertainty surrounding the future direction of U.S.-China economic relations. This is taking a toll on global economic growth, especially in China, where auto sales are noticeably weak and business confidence and inflation also have eased. Although the U.S. economy has withstood this headwind so far, additional trade restrictions with China would reduce U.S. GDP growth by several tenths next year, according to most estimates, unless the countries settle their dispute.
An additional headwind is the tightening of global credit. In the U.S., the combination of rising interest rates and quantitative tightening via the Federal Reserve Board's balance sheet selloff has negatively affected housing and auto markets, as large consumer purchases become increasingly unaffordable. Rising rates are likewise sparking concerns about the serviceability of domestic corporate debt as well as the health of the leveraged loan market.
Additional factors
It will also be important to monitor several other indicators in 2019. These include whether nonresidential fixed investment will slow down, oil prices decrease, housing weaken and a divided government lead to additional dysfunction.
Equipment verticals
The Foundation expects equipment and software investment to grow at a 4.1% pace in 2019, decelerating from an estimated 7.9% in 2018. Equipment and software investment growth is likely to weaken over the course of the year.
According to the Equipment Leasing and Finance Association's Monthly Leasing and Finance Index, new business volume expanded 4.6% in 2017 compared to the year prior, and may post even stronger gains in 2018 (currently, investment is up 4.7% relative to year-ago levels).
Based on the latest data, the following equipment verticals show particular promise in the months ahead:
- ships & boats
- railroad
- aircraft
- software
The following equipment verticals may struggle in the months ahead:
- mining & oilfield
- medical
- trucks
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