Investment Growth to Slow: ELFF

July 15, 2022

After a strong rebound in Q1, overall equipment and software investment growth is expected to slow significantly over the remainder of the year, though demand in some end-use markets should remain healthy, according to the Equipment Leasing and Finance Foundation (ELFF).

The Q3 update to the 2022 Equipment Leasing & Finance U.S. Economic Outlook forecasts equipment and software investment growth of 5.9 percent in 2022. The Foundation's report is focused on the nearly $1 trillion equipment leasing and finance industry and highlights key trends in equipment investment, placing them in the context of the broader U.S. economic climate.

“As economic conditions have generally worsened over the last several months, this outlook is noticeably gloomier than the last one,” said Nancy Pistorio, Foundation chair and president of Madison Capital LLC, in a prepared statement. “The Federal Reserve is hiking rates and yet inflation continues to accelerate. However, the report also indicates there are still several important factors, such as pent-up demand, supporting growth for now for equipment finance firms and the broader economy.”

Investment outlook for 2022

  • Equipment and software investment grew 16 percent (annualized) in Q1 and demand remains strong in several end-use markets for now. However, businesses are contending with ongoing supply chain issues and rapidly rising interest rates, along with historic inflation that is threatening to derail the economy.
  • Following negative GDP growth in Q1, downside risks continue to plague the U.S. economy. Although the labor market is still strong and consumer spending has largely held up, the economic outlook has soured. Inflation remains the largest concern for businesses, and although the Fed is finally acting aggressively, it is likely to take several months before significant inflation abatement occurs. Another modest GDP contraction in Q2 is likely, and a looming recession in Europe means less demand for U.S. exports in Q3/Q4. Achieving the Fed’s desired “soft landing” will be challenging.
  • Manufacturing output has remained strong despite a variety of headwinds facing the industry. Supply chain turmoil and high energy prices remain problematic, and rising borrowing costs are a growing concern. Still, the data point to significant pent-up demand waiting to be fulfilled should supply chains loosen later this year.
  • The outlook for Main Street businesses over the remainder of the year has worsened. Small business sentiment has fallen as inflation has accelerated, and hiring has slowed. As the Fed pursues sharply tighter monetary policy to combat inflation, small businesses are likely to feel the effects of higher borrowing costs before they manifest elsewhere in the economy.
  • The Fed is aggressively tightening monetary policy, which financial markets expect will continue in the coming months despite concerns of a growth pause or contraction.

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. This month, seven verticals are expanding/thriving, two are peaking/slowing, two are weakening/struggling, and one is recovering/emerging.

Equipment investment outlook for 2022

Over the next three to six months, year over year:

  • Construction machinery investment growth is likely to continue to decelerate.
  • Materials handling equipment investment growth may accelerate.
  • Agriculture machinery investment growth may have bottomed out, but is likely to remain weak.
  • Mining and oilfield machinery investment growth is likely to remain healthy.
  • Trucks investment growth may improve.

Source: Equipment Leasing and Finance Foundation