The Equipment Leasing & Finance Foundation (ELFF) published their Q2 update for the 2019 U.S economy at the beginning of April. You can download a copy of the full report below:
According to the report, last year’s equipment and software investments ended strong, “expanding 7.4% in the fourth quarter and 8.1% rate on the year.” This is the best annual performance rate since 2012. The equipment finance industry appears to be off to a slow start this year, but the expectation is that most equipment verticals should show positive growth by the end of 2019
Here is how the Economic Outlook Report summarizes the next 3-6 months (taken directly from the report):
- Agricultural Machinery investment growth is likely to slow
- Construction Machinery investment growth should remain weak and may contract
- Materials Handling Equipment investment is likely to expand at a modest rate
- All Other Industrial Equipment investment growth will likely remain weak and may stall
- Medical Equipment investment growth is expected to slow
- Mining & Oilfield Machinery investment growth may improve, but a strong rebound appears unlikely
- Aircraft investment should expand at a moderate rate
- Ship & Boat investment is likely to remain weak
- Railroad Equipment investment growth is likely to remain negative
- Trucks investment is expected to expand at a moderate rate
- Computers investment growth will likely growth modestly
- Software investment growth should slow.
Overview of the U.S. Economy So Far
The ELFF report states that the U.S. economy achieved a 2.9% growth in 2018. Consumer spending is cited as the backbone for continued growth this year. But the report does suggest that business investment is likely to slow down due to “lower oil prices, easing confidence, and waning global demand.”
Forbes.com also published a recent article on the effect that the trade war is having on global commerce. They cite the Organization of Economic Cooperation and Development (OECD) Interim Economic Outlook, a report published back in March, which you can also read below:
While these factors may contribute to greater weakness in global economic growth, the U.S. economy is still expected to increase. Again, consumer confidence remains high and spending growth should continue due to “a strong labor market and rising wages (ELFF Report).”
What this Means for the Equipment Finance Industry
The Momentum Monitor Sector Matrix (ELFF report) shows momentum being above the historical long-term average. It is expected that equipment and software investments will expand by 4.5% in 2019. Six of the sector verticals are reading above average, while two vertical experienced accelerated momentum, and only four verticals remain unchanged.
Last year was very solid for equipment leasing and financing. But the beginning of 2019 has been slow. February of 2019 saw $5.9 billion in new business volume, but that is actually a 24% decrease from the same month in 2018. Still, portfolio performance is healthy, and financial stress seems to be stable.
- 30-day delinquencies are slightly up from a year ago at 1.8% as of February
- Charge-offs are unchanged at 0.35% (still up from 0.28% last year)
Coming back from the ELFA Funding Symposium in Chicago, IL, LTi co-founder Randy Haug said, “Overall, people were in a pretty good mood. People were not in a mode of thinking about business slowing down. They were thinking about growth.”
Randy called the equipment finance industry a “key driver for economic growth in the United States.” Leasing provides capital for companies that want to expand and grow their businesses. So while there may be some slowing of the economy, Randy noted, we are still in a growth period. And the equipment finance industry, in particular, is doing quite well, which helps the larger U.S. economy.
The equipment finance marketplace is still seen as a good market. The economy may be slowing somewhat, but the equipment leasing side is still growing at a higher rate than the overall economy is right now, said Randy.
The Independents are Taking the Lead
One of the sectors that Randy Haug is most excited about is independent lessors. Large and middle-market lessors are, of course, enjoying economic growth, too. But the independents appear to be doing even better.
“What’s happened over the last few years,” Randy said, “is that smaller businesses are doing better now. And they’re investing in new equipment that’s replacing old, worn out equipment.”
The advantage that independent lessors have over the larger banks is that they can process certain deal structures that larger lessors won’t necessarily do. Many of the independent lessors came from larger banks and recognized a need in the marketplace for niche lessors. They stepped into these spaces and took the time to learn specific equipment types and needs of these niche markets.
“A lot of these independent leasing companies have become experts in the equipment,” Randy said. “So they know more about the equipment than even the people selling the equipment sometimes.”
Independent lessors are building strong relationships with their buyers. They know what types of equipment these buyers are looking for, and they are able to foster these more personal buyer-lessor relationships by diving deeper into these niche markets. Independents are being smart. They’re hustling hard. They have good operations and they’re putting good teams together. Independents are actually growing much faster than the general equipment lease industry. Which says a lot considering the growth that equipment finance is still experiencing.
The Journal of Equipment Lease Financing also noted, in their most recent publication, that “Almost 65% of all Independents increased their NBV last year, higher percentages than for competitors.” Showing that the Independent sector truly is experiencing significant growth.
Bringing it Home
Whether independent, middle-market or larger lessors, everyone in the equipment finance industry is doing well. And most sectors should expect to see continued growth.
While the recent floods have hurt many in the Ag industry, and that industry will likely take a bit of a hit, the flooding is not likely to be crippling. As farmers recover and file their claims, and insurers begin paying out those claims, the Ag sector will likely see an uptick of new equipment financing. Unemployment is also quite low. So you see more companies investing in equipment that allows them to increase their ability to automate. With fewer people available to fill those jobs, automation, and the equipment needed to do that will take on a greater role in the future.
The industry can expect to slow down a little bit this year. We may even see overall growth subside in the coming years. But, there will likely be a “softer landing” than we saw back in 2008, Randy Haug predicts.
“I don’t see a recession on the horizon,” Randy added. “I see some slow down, a pause, and then I see further growth. I’m pretty optimistic.”
Overall, the outlook continues to be good. While most analysts are not able to predict much past 6-9 months, especially with ongoing tariffs and trade talks, and a presidential year pending in 2020, the rest of 2019 is looking strong.
For the complete analysis, you can read the full ELFF report by clicking here: ELFF Q2 2019 Equipment Leasing & Finance U.S. Economic Outlook
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