Foundation predicts drop in investment

The Equipment Leasing and Finance Foundation (ELFF) has cut its forecast for equipment and software investment in 2016, which it now expects to grow at 2.7% rather than the 4.4% previously predicted, citing a number of “persistent headwinds” affecting the sector.

The Q2 update to the Foundation’s 2016 Equipment Leasing and Finance US Economic Outlook lowers the expected rate of increase compared to the growth forecast in its 2016 Annual Outlook released in December 2015.

The report predicts that equipment and software investment will expand modestly in 2016, as persistent headwinds—particularly a weak global economy and low commodity prices—curb business confidence and spending.

Ralph Petta, president of the Foundation and president and CEO of the Equipment Leasing and Finance Association (ELFA, said: “Growth in the volume of financed equipment slowed over the last quarter, reflecting a similar moderate growth pattern in overall equipment and software investment. Low oil prices and weak global demand appear to be largely responsible for business owners’ cautious approach to capital spending. Also, anecdotal and other data point to a slight erosion of portfolio quality, with delinquencies and losses ticking upward.”

The study suggests that equipment and software investment will expand by a modest 2.7% in 2016, somewhat slower than 2015’s 3.8% growth rate. Equipment and software investment declined at a 1.2% annual rate in the fourth quarter of 2015, a sharp deceleration from 7.2% growth in Q3. This contraction provides a weak “jumping-off point” for investment and will likely hold back annual growth.

The Foundation’s research indicates that recent turbulence in the world economy and financial markets has invited greater caution from businesses and consumers, and financial stress has ticked up in 2016. However, it says there is little evidence of major financial risks in 2016 and both consumers and businesses are expected to gradually increase their borrowing as headwinds fade. The Fed remains prepared to slowly raise rates this year, which may pull forward some investment and relieve some of the pressure on margins for equipment finance firms.

Sector variations

The report also includes the Foundation-Keybridge US Equipment and Software Momentum Monitor, which tracks 12 equipment and software investment verticals. This suggest that many equipment and software verticals are poised to moderate in coming months, although pockets of solid growth can be found in others.

According to this research, investment in the agriculture machinery and materials handling sectors are likely to remain generally weak over the next three to six months, while construction machinery investment growth will likely slow further over the period. 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, as is software investment growth, while investment in computers is likely to strengthen moderately over that timeframe.

The report anticipates that mining and oilfield machinery investment growth will stay weak over the near term, and says aircraft investment growth may slow over the next three to six months, although growth is historically volatile. Ships and boats investment growth could moderate in the next three to six months, and railroad equipment investment growth is likely to remain strongly negative over the same period. Trucks investment growth could slow over the next three to six months.