The ELFF Economic Outlook Report for Q4 2018
In October of 2018, the Equipment Leasing and Finance Foundation (ELFF) published their U.S. Economic Growth Outlook Q4 report. Many of you may have read this already, but in case you missed it, we wanted to put together a quick summary of what the report says, and include some comments on the report by our very own Executive Vice President and Co-founder, Randy Haug.
I sat down with Randy at the end of October, and asked him to reflect on the results of this report, what this report says about the future of our industry, and what it means for LTi Technology Solutions. If you’ve met Randy, then you know how generous he is with his time and insights, and he was no different with me.
Randy loves this industry and is always excited to talk about anything related to equipment finance. So it was a pleasure to have him contribute to this article. Of this report, Randy says,
“The Equipment Leasing & Finance Foundation Economic Outlook report, which is put out by Keybridge, is a great report for people in the equipment finance industry. I would recommend that anybody that’s in this industry, read this report. Because it’s a very thorough analysis.”
Here is the report in its entirety if you’d like to read it for yourself:
A Quick Summary of the Results
Equipment and software investments growth had soared in Q1 of this year, only to slow down the following quarter. But overall, investments remain healthy for the industry. The prospects going forward appear to be positive, though there are some factors that could get in the way of future growth.
The report cites rising interest rates and potential trade policy developments as the main factors that could impact the next couple of quarters and beyond. Agreements with Canada and Mexico are promising, but of course, everyone is watching what happens with China.
Overall, investments are expected to remain solid. Here are the predictions for the next 3-6 months for various industries, taken directly from the report:
- Agricultural Machinery Investment growth is likely to slow
- Construction Machinery investment growth should hold steady
- Materials Handling Equipment investment growth should remain modest
- All Other Industrial Equipment investment growth is likely to continue to decelerate
- Medical Equipment investment growth will likely remain stable
- Mining & Oilfield Machinery investment growth may strengthen
- Aircraft investment growth should remain solid
- Ships & Boats investment growth is expected to accelerate
- Railroad Equipment investment growth should improve
- Trucks investment growth should remain solid
- Computers investment growth should remain solid
- Software investment growth may soften
Breakdown of Weakening/Struggling Sectors
- Investments actually increased 33% annualized, up 22% from last year
- Exports of Other Agricultural Materials fell 5.9%
- Index continues to point to softening investment growth over the next 3-6 months
- Investment rose 13% annualized, up 10% year-over-year
- Shipments of Computers & Related Products fell 1.8% in August
- Consumer Price Index decreased 6.9%, first decline in 8 months
- Index also points to weaker investment growth over the next 3-6 months
Other Industrial Equipment
- Investment declined at a 5.4% rate annualized in Q2, but up 3.2% from a year ago
- Export prices for Industrial Supplies & Materials dropped 22% in August
- Industrial Production for Manufacturing fell 0.9%, its fifth straight decline
- Weaker investment growth over the next 3-6 months
Breakdown of Expanding/Thriving Sectors
Ships & Boats
- Momentum Index jumped from 117.1 in September to 120.7 in October
- Highest level since 2012
- Exports of Other Fee Grains surged 89% in July
- Employment in Boat Building rose 0.7% in August
- Index indicates continued investment rebound over the next 3-6 months
- Momentum Index held steady at 107.2 since September
- Industrial Production for Railroad Rolling Stock rose 3.6% in August
- Crude Oil & Petroleum Product Imports increased 4.4% in September
- Index suggests improved investment growth over the next two quarters
- Investment in Trucks rose 14% annualized in Q2, up 14% from a year ago
- Momentum Index increased from 99.9 in September to 102.6 in October
- Capacity Utilization for Automobiles & Light Duty Motor Vehicles rose 5.0 points 81.8% in August
- Index indicates solid growth in trucks investments over the next 3-6 months
What We’re Watching
According to the report, the main driver of U.S. economic growth this year has been capital spending. Combined with elevated business confidence, the rest of 2018 is looking pretty good. Spending across businesses, consumers, and the government are all making positive contributions to this growth.
Consumer spending has accelerated through Q2, and solid retail growth combined with a strong labor market suggests that growth will remain healthy. Aided by the recent tax laws and a less aggressive regulatory approach, business investment has also continued to grow.
“I think one of the big, big factors in the economy growing in 2018, has been about the tax law and the corporate tax changes.” Randy said. “Because there is a lot more money out there now for corporations to spend on buying new equipment and doing things like that. I think the economy can grow over 3% on the year, and if it does, that’s going to be very good for equipment finance”
But there are some factors to keep in mind that may be problematic down the road. Randy also echoed the report’s findings when he shared what he feels are the primary challenges the economy faces going into the next year. He said he thinks 2019 will be affected by three things:
- The FED is considering raising rates for the 4th time this year, making rate compression a factor
- The elections could have a significant impact on the way Congress looks
- The current tariff situation, which may or may not have a negative impact on U.S. exports
What’s Pushing the Economy Forward?
Strong Labor Market
Unemployment has stayed at or below 4% for six straight months now, which is the longest streak of this kind in almost 50 years. The economy has averaged 200,000+ job gains per month in 2018, 18,000+ more than in 2017. Record business confidence and windfall from 2017 tax cuts suggest continued hiring trends. We’ll just have to see if this is sustainable. For the next 3-6 months, though, the labor market should remain strong.
Healthy Consumer Spending
Real consumer spending has increased at a rate of 3.8% annualized during Q2. Since consumer spending accounts for almost 70% of economic activity, this is good news for the overall economy. Household debt ratios also remain low, at 9.8% (below the 25-year average of 11.3%), according to the report. Consumer confidence appears to be at an all-time high. So consumer spending should remain strong, at least in the short-term.
Robust Business Investment
Combined effects of tax cuts and deregulatory efforts have compelled businesses to continue to invest at a robust pace. Confidence remains elevated among both large and small firms. We expect expansion to continue for the next several months at least. Keep your eyes on the developments with new tariffs on China, and how they may retaliate with tariffs of their own. Rising interest rates may also dampen future capital spending.
What are the Headwinds for Growth?
Housing Sector Contraction
The report notes that the housing sector continues to face substantial headwinds as housing investment has continued to stagnate with a 1.3% second quarter contraction. Housing permits have fallen, and the housing market is facing the issue of supply versus demand. Affordability and rising mortgage rates are the main concern while scarcity of labor and rising input prices have driven up the cost of building new homes.
Auto Sector Slowdown
Auto sales have slowed to their weakest level since 2017. The trade disputes with China are not going to help as prices for steel and aluminum keep climbing. Further exacerbating the issue, the domestic demand for automobiles appears to have peaked in 2016 and is expected to continue to decline this year.
Emerging Market Turmoil
Rapid depreciation of currency in many emerging markets, along with struggling stock markets, has causes a lot of investors to pull out of these high-risk markets. Although some market turbulence is typical and don’t necessarily translate into a larger economic downturn for these places, speculation does contribute to a loss in market confidence. According to the report, this loss of confidence can lead to, “rampant inflation, stock market declines, and economic recession.” About half of U.S. exports flow to these emerging markets, so these kinds of events could significantly affect U.S. growth.
How Recent Trends Effect Equipment Leasing and Financing
The projection for equipment and software investment expansion in the ELFF Outlook report is 7.9% in 2018. This would be the strongest annual growth since 2012. The ELFF’s Momentum Monitor Sector Matrix, summarized above, 7 of the 12 verticals are at or above the long-term historic average. With Software, Agriculture, and Other Industrial sectors being the only ones falling into the Weak/Struggling categories with decelerating momentum.
For equipment leasing and financing, new business volume remains strong. The industry itself gained $8.9 billion in new businesses, which is up 14% compared to last year. Portfolio performance remains healthy, but there is some looming financial stress that we are watching. Namely, 30-day delinquencies haven’t changed since August, holding on at 1.90%.
As an industry, we should be preparing for increased lender competition and riskier lending behavior as more businesses try to take advantage of the new volume we noted above. Charge-offs may also increase over the next 6-12 months if those delinquency levels keep rising. Having said that, the equipment leasing and financing industry remains on solid footing so far in 2018. And the expectation is that it will continue to rise.
While there are a few things to watch out for, the industry is in a really good spot overall.
What Does this Mean for LTi?
As a software development company, we pay attention to a lot of this information in order help our customers take full advantage of new growth. With emerging and expanding markets, we know that these are great opportunities for our customers to expand their offerings and reach new clients.
LTi’s president, Jeff Van Slyke shared his thoughts about the current economy and what this means for LTi:
“A strong US economy, highlighted by significant investment in equipment and software, tells me that the health of the equipment finance marketplace is going to continue to be great. This means plenty of new opportunities for our customers to expand their businesses.
Of course, this is very positive for LTi as there will continue to be new entrants into the marketplace and our current customers will want to continue to invest more in their operations.”
While it may be easy to be distracted by good numbers and business opportunities, Jeff emphasized that the people we serve are really who matter the most in our business:
“It is imperative that we are focused on providing our customers a high level of service. In the end, we are more than a software supplier; we are a partner with our customers, aiding their success.”
All in all, we are as enthusiastic about this report as you probably are. A good economy strengthens good businesses. Where we can help businesses thrive is by providing the software support and technology solutions they need in order to be efficient and profitable.
As our Co-Founder Randy Haug told me:
“Our ideal customers are those who are highly diversified in what they offer, or they are part of an emerging market that is going to need a good system that can handle that growth.”
Does this sound like you or your company? Are you looking to expand your business and take advantage of where the economy is going?
Or, do you just need a better software solution than what you are currently working with?
The size of your company doesn’t matter as much as your passion to help other businesses get the equipment they need in order to make a difference in their communities. And we want to help you help them.
Get in touch with one of our sales reps and let us know how LTi and ASPIRE can improve your processes and grow within this strong economic environment. You can start by requesting a demo or requesting information here.