“Breakout” year to be fueled in part by oil drop

Investment in equipment and software is forecast to grow 6% in 2015 as the economy steadily improves, according to the Equipment Leasing and Finance Foundation. This could bring total business investment to a record $1.484 trillion in 2015.

Two recent announcements from the trade group and an affiliate, representing bank and nonbank leasing companies, cover important trends for business lenders.

Outlook for 2015

“Equipment investment has been relatively modest in recent years, but picked up in 2014 and now seems poised to maintain this momentum into 2015,” said William Sutton, foundation president. Sutton, who also heads the Equipment Leasing and Finance Association, said that the groups’ research indicates that new business volume is up, business confidence is up, and steady growth is forecast. Sutton covered these trends in a mid-December announcement.

Sutton says that the economy is going to have a breakout year. Key bright spots contributing to positive trends, as identified by the groups, include an improving labor market; increased access to credit; lower oil prices; and “fiscal healing.” However, tempering those factors are potential drags, including political gridlock, global economic weakness, and geopolitical risks.

The groups’ research found that equipment and software investment rose 9.3% in 2014’s third quarter, after rising by 9.6% in the second quarter. Growth will fall somewhat in 2015 through the final quarter, coming in at an expected 5.9% for the entire year, leading into the 6% forecast mentioned above.

Many categories of industrial equipment investment will be strong, the groups said, but some sectors will moderate or decline.

For example, agricultural machinery investment may decline a bit over the next three to six months. Similarly, investment in construction machinery is expected to moderate in the first and second quarters, as will materials handling equipment spending. Given the declines in oil prices, the groups anticipate investment in mining and oilfield machinery will slow or even see negative growth. The latter jibes with reports in the news media about cutbacks in investment and activity by some energy companies.

On the other hand, computer investments will be stable over the next six months, according to the research. Investments in software, however, will moderate.

In the transportation sectors, investments in aircraft, ships and boats, and trucks are forecast to be stable, while investments in railroad equipment will moderate.

Equipment acquisition trends for 2015

This month the groups forecast acquisition trends for the new year. Among the points in the January projections, adapted from the groups’ announcements:

• Businesses will invest in equipment not just to replace aging assets, but also to aid in expansion.

The pent-up replacement demand that has driven equipment investment in previous years may be supplemented by long-awaited expansion investment as capacity utilization rates in some industries reach or surpass levels historically known to spur business investment.

• Improving market conditions will continue to increase credit supply and demand for equipment acquisitions.

As the economy steadily improves and business confidence continues to increase, credit standards should modestly loosen. The propensity to finance decreased in the wake of the financial crisis as businesses deleveraged and refrained from new business investment.

Since bottoming out in 2010, the rate at which businesses finance their capital spending has grown consistently and will continue to increase in 2015 with steady economic recovery and shifts in Federal Reserve policy.

• Eyes will be on short-term interest rate increases.

Expectations for the Federal Reserve to raise short-term interest rates in 2015 should spur equipment investment as businesses seek to lock in equipment financing at lower rates. Despite rate increases, businesses will find that a highly competitive "buyer's market" will continue to make financing an attractive option for acquiring equipment.

• Businesses will use financing for a majority of their plant, equipment, and software expenditures.

In 2015, 62% or $922 billion of investment in plant, equipment, and software in the U.S. is expected to be financed through loans, leases, and lines of credit.

A majority of businesses—seven out of 10—will use at least one form of financing to acquire equipment.

• Advances in the use of technology will drive innovative financing options.

Equipment finance providers are streamlining their business processes and improving customer self-service capabilities using digital technologies.

At the same time, some end-users are moving away from traditional equipment consumption models and toward hosted or managed services based on usage rather than total ownership.

To meet customer demand and address evolving technology equipment requirements, equipment finance companies will tailor innovative financial offerings.

• Nontraditional financing will continue to grow and play a larger role in the equipment finance industry.

As regulatory scrutiny increases and some banks' lending standards tighten for certain credits, nontraditional financing sources, such as investment bankers, venture capitalists, insurance companies, crowd funders, and others, are exploring opportunities in the equipment finance sector.

• A final lease accounting standard will be released.

The Financial Accounting Standards Board and the International Accounting Standards Board continue to work on the lease accounting project, which will change how leases are accounted for on corporate balance sheets. A final standard is anticipated in 2015, with a possible effective date of 2018 or later. The good news is that the benefits of leasing equipment will remain intact despite the lease accounting proposal.