The Economy

Capex Numbers Reflect No Expansion

Capital-equipment investment was higher last month, but replacement was still the driver.
Vincent RyanSeptember 27, 2011

A barometer of capital spending on equipment – the financing of everything from copy machines to commercial aircraft – was up year-over-year in August, but not enough to suggest that businesses are doing anything more than replacing aging assets.

The Equipment Leasing and Finance Assn.’s (ELFA) Monthly Leasing and Finance Index (MLFI-25) shows new business volumes at $5.7 billion for August, up from $4.3 billion a year earlier but unchanged from July. Year-to-date, new business volume is up 25% over 2010, according to the MLFI-25.

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“The numbers are going in the right direction, but we’re seeing that very slow recovery that economists are talking about,” says William G. Sutton, president and CEO of the ELFA. “Companies are replacing equipment and staying in business, but they’re not in expansion mode.”

Pessimism about the overall economy was also reflected in the group’s Monthly Confidence Index, released last week. That index dropped to 47.6 from a level of 50 in August. Assessing business conditions over the next four months, only 4.9% of equipment-finance executives say they expect conditions to improve, versus 13.2% responding positively in August.

Other measures of the MLFI-25 were upbeat in August. The credit quality of finance companies’ portfolios improved as receivables aged over 30 days fell to 2.5%, down from 4.3% a year earlier. Charge-offs as a percentage of net receivables dropped slightly, to 0.6%.

The results also show evidence of an easing of credit conditions, says Sutton. Equipment-finance companies put more transactions through the credit-approval process, and a greater percentage of leases and financings were approved – 77.6%, up from 76.3% in July. In contrast, during the recession the number of credit applications submitted and the percentage of approvals both contracted.

While equipment financing could rise more this month as businesses ink deals before the quarter’s end, the continued underperformance of sectors such as construction, trucking, and small and midsize enterprises will keep the brakes on new business volumes, Sutton says. The economy has to be in full expansion mode – with gross domestic product growth of about 3% – for capital spending on equipment to take off.

To obtain the MLFI-25 numbers, the ELFA surveys 25 member equipment-finance companies, both captive and independent. The firms represent a cross-section of the sector, says the association.