Marked slowdown in equipment and software investment

Investment in equipment and software is expected to grow a sluggish 0.9% in 2016, according to the latest data released by the Equipment Leasing and Finance Foundation, which has cut its original growth forecast for the year by more than half.

According to the Q3 update to its 2016 Equipment Leasing and Finance US Economic Outlook report, the Foundation has revised its forecast to 0.9%, down from 2.7% growth forecast in its Q2 update to the 2016 Economic Outlook released in April.

It says the slow growth in business investment is due to a combination of slow growth in the global economy, a contraction in trade, heightened political uncertainty and low commodity prices. The Foundation’s report, which is focused on the $1 trillion equipment leasing and finance industry, highlights key trends in equipment investment and places them in the context of the broader US economic climate.

Ralph Petta, president of the Foundation and president and CEO of the Equipment Leasing and Finance Association (ELFA), said: “Sluggish growth in equipment and software investment projected over the short term by this latest Foundation analysis is indicative of the slowdown in business fixed investment reported by federal government data over the past several quarters.”

“The equipment finance sector generally mirrors overall performance of the US economy. A number of factors, both domestic and externally focused, cloud the growth picture for the equipment finance industry, and this slow-growth scenario, in all likelihood, will continue for the rest of the year as many ELFA members report soft business conditions,” he added.

The revised figure represents a significant slowdown from last year’s 3.8% growth. Equipment and software investment contracted significantly in the first quarter of 2016, and although investment should rebound somewhat in the months ahead, the poor first quarter performance will limit overall investment growth for the year, the Foundation’s analysis shows.

According to the survey, supported by generally healthy domestic fundamentals, the US economy is forecast to expand 2.2% in 2016, slightly slower than the pace of growth over the past two years. Headwinds, including uncertainties posed by the results of the Brexit referendum, a trend of declining global trade and a persistently strong dollar, are expected to continue to hurt US market confidence and slow economic growth.

The Foundation says a modest increase in business demand for credit may indicate a small revival in business investment later in the year. Overall, credit markets are healthy and do not currently exhibit any major red flags that would hurt consumers or businesses this year.

Most verticals “weak” 

The Foundation produces the Equipment Leasing & Finance US Economic Outlook report in partnership with economic and public policy consulting firm Keybridge Research. Included in the survey is the investment momentum monitor, which tracks 12 equipment and software investment verticals.

Latest results suggest investment in most verticals is likely to remain relatively weak through the end of the year. Over the next three to six months the research indicates agriculture machinery investment growth should remain weak, and construction machinery investment growth will likely remain sluggish. Materials handling equipment investment should grow slowly, but all other industrial equipment investment growth is likely to weaken.

In addition, mining and oilfield machinery investment growth will likely remain negative, as will railroad equipment investment growth. Aircraft investment growth may remain weak, although growth is historically volatile, and Ships and boats investment growth will likely slow. Trucks investment growth should be subdued, but a turnaround may be on the horizon.

The two other brighter spots on the horizon are medical equipment investment and computer investment, which should both grow modestly, along with software investment growth which is poised to remain solid.