Construction Equipment Investment Continues ‘Elevated’: ELFF

Oct. 18, 2021

Owing largely to the burst of business activity in the spring and early summer that came in part thanks to rising vaccination rates, annual equipment and software investment growth of 13.2 percent is forecast for 2021, according to the Q4 update to the 2021 Equipment Leasing & Finance U.S. Economic Outlook from the Equipment Leasing & Finance Foundation.

A companion report, The Foundation-Keybridge U.S. Equipment & Software Investment Momentum Monitor, suggested that construction machinery investment growth will stay elevated for the year. Investment rose 17 percent (annualized) in Q2 2021 and is 31 percent above its year-ago level. The Construction Momentum Index was unchanged at 114.9 (revised) in October. Overall, the Index’s recent movement suggests construction machinery investment growth will stay elevated over the next six months.

Annual U.S. GDP growth for 2021 is forecast at 5.3 percent. The Foundation’s report, which is focused on the nearly $1 trillion equipment leasing and finance industry, highlights key trends in equipment investment and places them in the context of the broader U.S. economic climate.

“The Q4 update indicates that optimism eased somewhat as the spread of the Covid-19 Delta variant began weighing on consumer confidence and economic activity,” said Scott Thacker, Foundation chair, in a prepared statement. “The trajectory of the virus this fall and winter, inflation, and fiscal policy are the most significant unknowns to consider during the upcoming six months. Fortunately, the overall outlook portrayed in the Q4 update is more optimistic than it was a year ago. Businesses continue to invest despite supply chain issues and labor shortages, which bodes well for the equipment finance industry.”

Highlights of the 2021 outlook

  • Equipment and software investment rose 12.7 percent (annualized) in Q2 and is well above its pre-pandemic level. Business investment has remained strong despite emerging economic headwinds, though these headwinds could begin to weigh on investment later this year.
  • The U.S. economy expanded at a robust 6.7 percent (revised) annualized rate in Q2 2021, about the same pace as in Q1. GDP has now eclipsed its level from the end of 2019, just before the pandemic began.
  • The U.S. manufacturing sector continues to face historically high levels of demand, although growth decelerated over the last quarter. Meanwhile, U.S. industrial output has been constrained by ongoing supply chain issues and high input prices.
  • Business prospects for Main Street have been tempered somewhat since the summer as the resurgence of Covid has reduced consumer mobility, spending, and confidence. Small businesses are also contending with labor shortages, supply chain delays, and inflationary pressures, but are better equipped for headwinds due to healthy lending activity and a slow, steady rise in vaccination rates.
  • Federal Reserve officials largely maintain that ongoing inflationary pressures are mostly temporary. However, officials have signaled that the Fed is ready to begin “tapering” its asset purchases soon, which would translate to tighter financial conditions.
  • The spread of the Delta variant has dampened activity in some areas and has likely slowed economic growth significantly in Q3. Factors to watch for the rest-of-year outlook include concerns of persistently high inflation, uncertainty surrounding fiscal policy, the potential for tighter financial conditions that could impact equity markets, and the trajectory of the pandemic.

The Foundation-Keybridge U.S. Equipment & Software Investment Momentum Monitor, which is released in conjunction with the Economic Outlook, tracks 12 equipment and software investment verticals. In addition, the Momentum Monitor Sector Matrix provides a customized data visualization of current values of each of the 12 verticals based on recent momentum and historical strength. Eight verticals are showing signs of accelerating investment, and four other verticals are showing signs of peaking. Over the next three to six months, year over year:

  • Construction machinery investment growth will stay elevated.
  • Mining and oilfield machinery investment growth should accelerate.
  • Trucks investment growth should remain robust.
  • Materials handling equipment investment growth should remain robust.
  • All other industrial equipment investment growth should remain elevated.
  • Agriculture machinery investment growth may ease, though year-over-year growth will likely remain in positive territory.
  • Medical equipment investment growth will likely remain in positive territory.
  • Aircraft investment growth will remain elevated, though may have peaked.
  • Ships and boats investment growth should remain healthy.
  • Railroad equipment investment growth should continue to improve, though upside potential may be limited.
  • Computers investment growth should remain in positive territory and may even accelerate.
  • Software investment growth should remain elevated.

Source: Equipment Leasing & Finance Foundation