Business Investment Continues to Expand at a Robust Pace, Contributing to a Likely Strong Year for the U.S. Economy.
After solid growth in 2017, investment in equipment and software should remain strong in 2018 and is projected to expand 7.0 percent (down from 8.5 percent in the Second Quarter Economic Outlook published in April) according to the third quarter update to the 2018 Equipment Leasing & Finance U.S. Economic Outlook released by the Equipment Leasing & Finance Foundation.
Business investment continues to expand at a robust pace, contributing to a likely strong year for the U.S. economy. Overall, the economy is expected to grow 2.8 percent in 2018, up from 2.7 percent in its previous outlook and significantly better than last year’s 2.3 percent growth rate.
The quarterly report by the Foundation, which is focused on the $1 trillion equipment leasing and finance sector, highlights key trends in equipment investment and places them in the context of the broader U.S. economic climate.
Jeffry D. Elliott, Foundation chairman and senior managing director of Huntington Equipment Finance, said, “Momentum continues to be positive for the equipment finance industry with a forecast including a stable growing capital expenditure environment.”
Highlights from the study include:
- Capital spending has been solid thus far in 2018, and strengthening economic momentum coupled with elevated business confidence levels should lead to continued investment during the third and fourth quarters. Investment in equipment and software is expected to grow by 7.0 percent, and financial stress remains low. Credit supply conditions are mixed as banks are easing standards for C&I and commercial real estate loans while tightening standards for household lending.
- Solid economic fundamentals suggest the economy could reach the 3 percent annual growth target in 2018, but a stagnant housing market, potential softening in global growth (particularly in emerging markets), and continued upheaval in U.S. trade policy are areas of concern.
- Overall, the U.S. economy remains on firm footing in 2018 as most major GDP components are contributing positively to growth, with the notable exception of housing. The labor market should maintain its strength and drive improvements in consumer spending (which fell far short of expectations in the first quarter), while business investment should continue to impress.
The Foundation-Keybridge U.S. Equipment & Software Investment Momentum Monitor, which is included in the report, 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. Overall, investment in most equipment verticals should remain solid in 2018.
Over the next three to six months:
- Construction machinery investment growth should hold steady, though investment growth may peak later this year.
- Material handling equipment investment should continue to grow at a moderate pace.
- Mining and oilfield machinery investment growth may improve.
- Aircraft investment growth is unlikely to worsen and may improve.
- Ships and boats investment growth is expected to increase.
- Railroad equipment investment growth should remain steady.
- Trucks investment growth may soften.
- Computers investment growth should remain solid.
- Software investment growth should remain stable.
- Agriculture machinery investment growth will likely soften.
The Foundation produces the Equipment Leasing & Finance U.S. Economic Outlook report in partnership with economic and public policy consulting firm Keybridge Research LLC. The annual economic forecast provides a three-to-six-month outlook for industry investment with data, including a summary of investment trends in key equipment markets, credit market conditions, the U.S. macroeconomic outlook, and key economic indicators. The third-quarter report is the second update to the 2018 Annual Outlook and will be followed by one final quarterly update prior to the publication of the 2019 Annual Outlook in December.
Download the full report at www.leasefoundation.org/industry-resources/u-s-economic-outlook. All Foundation studies are available for free download from the Foundation’s online library at store.leasefoundation.org.
Earlier this year, the Rock Products Benchmark Study 2018 revealed that about 54 percent of survey respondents reported an increase in their company’s capital expenditures for 2018.
This year approximately 28 percent of the survey group plan to spend up to $500,000. About 24 percent plan to spend $1 million to $5 million this year. Another 23 percent of the survey group planned to spend $5 million to $10 million. Approximately 21 percent planned to spend $500,000 to $1 million, a nice jump from 2018 when 16 percent chose that dollar range.
And what do they plan to buy?
- Equipment upgrades, 59.76 percent.
- New equipment, 58.54 percent.
- Plant additions, 34.15 percent.
- Used equipment, 25.61 percent.
- Mine development, 23.17 percent.
- Technology upgrades, 21.95 percent.
- Permitting and bonding, 20.73 percent.
- New plant construction, 19.51 percent.
- Quality control, 13.41 percent
- Exploration, 10.98 percent.
- New mine start up, 10.98 percent.
- Reclaim systems, 8.54 percent
- Other, 1.22 percent.
Over and above consumables, such as oil, safety supplies, maintenance equipment, tires and replacement parts, the top equipment areas being considered for 2018 are:
- Motors, 52.44 percent.
- Pick-up/utility vehicles, 50.00 percent.
- Pumps, 40.24 percent.
- Material handling/conveying equipment, 46.38 percent.
- Screening and sizing equipment, 46.30 percent.
- Drilling and blasting suppliers/services, 32.93 percent.
- Excavators/loaders/dredges 39.02 percent.
- Portable crushing/screening plants, 29.30 percent.
- Washing and classifying equipment, 29.24 percent.
- Haul trucks, 24.44 percent.
- Scales, 24.39 percent.
- Breakers, 24.33 percent.
- Crushers, 21.95 percent.
- Automation products, 21.95 percent.
- Drones, 14.63 percent.
- Energy management, 10.98 percent.
- Frac sand equipment, 3.66 percent.
- Other, 2.44 percent.
Manufacturing: A Warning for 2019
It’s been a banner year so far for the industrial sector, but will manufacturing continue to help carry the U.S. economy and drive solid growth through the remainder of 2018?
The short answer is yes. However, according to economist Eli Lustgarten of ESL Consulting, while the near-term outlook for both manufacturing and the overall economy is strong, there is growing concern about 2019 and beyond.
“There are a lot of underlying issues that make economists and businesspeople nervous,” said Lustgarten, who outlined his thoughts on the latest manufacturing, agriculture and construction market data at the recent Association of Equipment Manufacturers “Thinking Forward” event in Chicago. “Not for 2018, but for 2019.”
A number of warning signs suggest significant economic growth will not continue into next year. According to Lustgarten, consumer spending appears unsustainable and underlying data suggests many Americans are currently living beyond their means. Other prevalent factors Lustgarten and fellow economists believe could hinder future growth include:
- Higher inflation.
- Rising borrowing costs.
- More stringent immigration policies, which could limit labor availability.
- The rising fear of trade protectionism due to recent tariff announcements.
- The uncertain future of NAFTA.
Economic growth abroad is also poised for a slowdown in 2019. According to Lustgarten, the latest data suggests China’s outlook isn’t as promising as hoped, monetary changes indicate future tightening, oil prices are rising, and trade issues are becoming problematic.
The U.S. construction equipment market is currently experiencing a solid upturn, largely driven by the rise of rental. According to Lustgarten, percentage of sales from rental has risen from 35 percent at the beginning of the decade to more than 55 percent today.
Other economic data related to construction is mixed. Housing has been slow to recover from the collapse proceeding the Great Recession last decade, as has non-residential construction spending. However, there is reason for optimism to be found in the fact that spending on new construction machinery has accelerated greatly, and overall construction expenditures have recovered as well. According to Lustgarten, in 2008 and 2009 construction equipment spending fell by 70 percent, but gains of 38 percent in 2011 and 25 percent in 2012 have helped the sector bounce back over time.
2018 looks to be a good year for the farm equipment sector, which is especially welcome news on the heels of a solid 2017. Last year, farm equipment sales began to stabilize after a lengthy period of decline.
“We’re in the position where the farm equipment sector is sort of stable, and in fact, is even improving this year,” said Lustgarten.
Unfortunately, the same can’t be said for commodities markets. The supply of U.S. crops far exceeds demand right now, and it’s leading to significant year-to-year carryovers and depressed prices. Cutting production will be key for ag markets in the short term, as is finding ways to raise demand.
2018 looks quite good, but economic growth in the U.S. is poised to slow as soon as next year. However, according to Lustgarten, the passage of a timely infrastructure bill would certainly help to improve the long-term outlook for the manufacturing, ag and construction sectors.
“Policies matter, and an infrastructure bill would actually create a mini-boom,” he added.