The U.S. economy is full of unknowns currently as the threat of recession, further rate hikes, and increasing prices loom over the heads of businesses across industries. But despite these pressures, companies have continued investing in equipment and software to meet demands in multiple sectors rather than reducing spending and capital investments.
“These investment trends demonstrate the continued need to drive innovation, resolve labor constraints, and combat margin compression,” explains Mike DiCecco, Executive Managing Director of Asset Finance at Huntington, and Immediate Past Chairman of the Equipment Leasing & Finance Association (ELFA).
Companies developing their operational strategy can use these trends to help inform their equipment and software investment decisions through the end of this year and beyond.
In this article, we'll highlight significant industry trends and the factors driving them and explore what they could mean for your business.
2022 brought highs and lows for the industry
The equipment and software finance industry had ups and downs in 2022. The beginning of the year brought increased investments and strong demand in several markets that spurred a 16% annualized growth for the industry, according to the Equipment Leasing & Finance Association (ELFA) report from July 2022†. However, rising interest rates and Fed rate hikes dampened that demand, as evidenced by Q2's relatively flat growth to just 1.9% and Q3's projected 5% growth‡.
Despite this overall slowdown, the Equipment Leasing & Finance Foundation's Q4 Economic Outlook found several verticals that saw double-digit growth, including mining and oilfield equipment, agricultural equipment, and software, demonstrating the continued investments in the industry to meet pent-up demand§. According to the outlook, the medical and railroad sectors are anticipated to accelerate investments in the near future.
While aggressive rate hikes plagued the beginning of the year, recent U.S. inflation measures coming in under forecast in October could signal their end. The Feds could be poised to slow rate hikes, which could, in turn, spur further demand in 2023.
What does this mean for your business?
The wild swing from Q1 to Q2 seems to be an outlier rather than an expected trend. Though Q2 saw slow growth, the industry is expected to rebound modestly throughout the year, signaling a continued need to meet pent-up demand from 2020 to 2021. Businesses in the verticals seeing the highest growth could consider further investments to meet market needs and remain competitive.
Steady growth in the face of volatility
Supply chain constraints, increasing rates, and economic uncertainty have dominated headlines for the past two years. But despite these difficulties and the ongoing threat of a recession, business volume is trending up, and demand and production are rising.
According to ELFA, which reports economic activity from 25 companies, overall new business volume in September 2022 in the equipment finance sector was up 11% year-over-year and up 16% from August¶. Additionally, ELFA found the rate of late or delinquent payments in September 2022 was down from the previous year.
These trends demonstrate that despite the looming possibility of recessionary activity, businesses continue to invest in new capital expenditures. They are not necessarily experiencing a lack of cash flow sufficient to increase delinquent payments on that new equipment or software.
Industrial production and capacity utilization for manufacturing also grew in September, according to ELFF's Q4 U.S. Economic Outlook Report≠. As industrial activity increases so does the need for improved supply chain management. Investing in artificial intelligence technology or nearshoring could help with this increased industrial activity to meet demand in 2023.
What does this mean for your business?
Business volume is up, demand is still high, and businesses financing equipment are earning enough revenue to maintain payments.
“Your business can see this as a sign that demand is expected to continue and leasing new equipment could be a wise investment,” says DiCecco. “Meeting that demand now could be the difference between surviving and thriving during a recession.”
Additionally, resolving supply chain constraints could be a significant factor in weathering an economic downturn, which could be done through investments in artificial intelligence or nearshoring supply chains in Mexico or Canada.
Post-pandemic activity driving equipment and software investments
Understanding why investments in specific verticals are increasing can help predict future activity. The ELFF's 2022 Industry Horizon Report, which surveys equipment end-users to help estimate the industry's size in the coming year and beyond, compiled data on the equipment verticals most likely to be financed this year. Of the 13 verticals included in the survey, medical equipment was at the top, followed by other industrial equipment and construction machineryⱢ.
While businesses across every industry face rising labor costs and availability issues, the healthcare industry is being hit particularly hard. Labor shortages are forcing healthcare facilities to rely on contract nurses and locum tenens physicians, which contribute to massive cost increases. Investment trends toward new equipment and software, specifically those powered by automation or artificial intelligence, could help alleviate those hardships.
The reasoning behind investments underlines this trend. When asked for the reasons behind financing additional equipment over the coming 12 months, respondents cited "protection from equipment obsolescence" (31%), "increased prevalence of remote or hybrid work" (28%), and "trajectory of pandemic and impact on demand or operations" (24%) among other reasonsⱠ. The latter two were new categories added to the survey this year and demonstrate how post-pandemic activity has affected businesses.
What does this mean for your business?
“These trends show businesses understand the need to rely on sophisticated equipment and software in the face of reduced labor availability, rising labor costs, and increased prices,” explains DiCecco.
These concerns are particularly relevant for the healthcare industry, as evidenced by medical equipment being the most financed vertical. Businesses can consider these trends and economic headwinds as opportunities to invest in areas that can best help operations maintain or grow during a recession.
2023 may bring opportunities for boosted equipment demand
Three infrastructure-related bills could further drive equipment and software demand in the coming years:
1. Infrastructure Investment and Jobs Act (IIJA). In November 2021, the Infrastructure Investment and Jobs Act bipartisan bill was passed to improve infrastructure in the U.S. The funds allocated toward these investments have the potential to result in tremendous increases in equipment leasing for trucks, construction equipment, and freight and passenger rail equipment.
Breakdown of the billÕ:
- Aimed at improving roadways, public transit, airports, bridges, clean drinking water, internet access, and clean energy, among other areas.
- Includes the single most significant investment in clean energy transmission in U.S. history.
- Provides $1.2 trillion ($500 billion in newly authorized funds) in investments for domestic infrastructure projects.
2. The CHIPS and Science Act of 2022. In August 2022, the CHIPS and Science Act federal statute was signed into law, providing billions in funding to boost domestic chip manufacturing and research. It was developed following the global chip shortage that began in 2020 and continues today. Shifting chip manufacturing and development state-side eases those shortages and allows the U.S. to compete globally.
Breakdown of the billΩ:
- Provides more than $52 billion in subsidies for chip development, research, manufacturing, and workforce development in the U.S.
- Offers 25% investment tax credit for capital expenses for manufacturing chips and related equipment.
- Includes $10 billion to invest in regional innovation and technology hubs in the U.S.
3. The U.S. Inflation Reduction Act (IRA). In August 2022, the U.S. Inflation Reduction Act federal law was passed, making a significant investment in climate and energy. One of the ways this law aims to address climate change is by investing in domestic energy production, clean energy, and energy transition. The clean energy technology sector represents an enormous market opportunity for the U.S. and will benefit greatly from the incentives provided by this law, which in turn will drive innovation and growth. Other markets will also greatly benefit from clean tech growth by accelerating demand for residential and transportation infrastructure, additional education, agriculture and land use, and new financial markets.
Breakdown of the bill††:
- Invests $369 billion toward climate technology, clean energy opportunities, and energy transition.
- Aims to lower energy costs, increase cleaner production, and reduce carbon emissions.
- Offers tax credits for new electric vehicles (up to $7,500) and used EV (up to $4,000).
- Devotes $11.7 billion to support loans through the Energy Infrastructure Reinvestment program, which focuses on improving energy infrastructure.
What does this mean for your business?
Investments through these three bills will likely be a boon for the equipment leasing and finance industry as manufacturers invest in capital expenditure projects to take advantage of funds and tax incentives. Consider how these bills could positively impact your business, then determine which capital investments could fall within those guidelines to take advantage of funding and tax credits.
Growing your business through capital investments
Watchful, attentive analysis of investment trends can help your company develop its operational strategy and make smarter financial decisions. Reach out to your relationship manager to learn more about equipment and software investments to improve your business.
