The Economy

Equipment Spending’s New Year’s Hangover

Expect weak business investment in agricultural, industrial, and computer and software assets in the next three to six months.
Vincent RyanDecember 19, 2012

If you’re an equipment maker or a supplier to one, the postholiday months will not be too merry. The Equipment Leasing & Finance Foundation says most U.S. companies are going to keep a tight rein on new equipment orders for the first half of 2013. Soft demand and fiscal uncertainty will give business little reason to make and finance new purchases in the first half, says the foundation’s 2013 economic outlook report.

The forecast, released this week, comes on the tail of a third-quarter 2.7% (annualized) fall in equipment and software investment, data the foundation says shows U.S. companies have essentially “hit the pause button” until Washington resolves the fiscal cliff.

Among the equipment-finance sectors likely to see weak investment in the next six months:

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Agriculture. After a sharp 40% drop last quarter, the fourth quarter and the first quarter of 2013 will see continued contraction. “One of the worst droughts on record has depressed crop production, and with it, demand for new equipment,” according to the foundation.

Computers and software. Third-quarter year-over-year growth was just 0.5% last quarter, after hitting 5.3% in the second quarter. Investment will stagnate for the next three to six months.

Medical. Down slightly so far this year, growth in investment will range between -2% and 2% in the next three to six months. “The signposts remain soft, suggesting stagnant growth in investment over the next quarter,” the foundation report says. The effects of “Obamacare” are still unknown and politically controversial, the report notes, but ultimately the law could be a net positive for the industry.

Industrial. Third-quarter growth slowed to 4.5%, down from 13.1% in the second quarter. The drop was “foreshadowed by weaker industrial production, stagnating capacity utilization, and only slight gains in manufacturing orders,” the foundation says. Growth will be average in the next three to six months. While federal government policy uncertainty is stunting investment, a long-term trend toward “reshoring” U.S. companies’ manufacturing will drive some demand.

There are two bright spots for the next six months:

Transportation. After growing 27% in the first and second quarters this year, transportation equipment outlays grew 11.1% in the third quarter. During the next three to six months, investment will moderate to about 10%. As reason for its optimism, the foundation notes that “real personal consumption expenditures for motor vehicles and parts continues to demonstrate strength.”

Construction. After some lean years, construction-equipment investment is rebounding strongly, growing 52% year-over-year in the third quarter. As the U.S. housing market continues to improve — sales of new single-family homes and housing building permits are up 112% and 30% year-over-year, respectively — equipment investment will average about 15% growth in the first half of 2013, says the report.

For the third and fourth quarters of 2013, the foundation says investment activity will regain momentum, leading to yearlong 2.9% growth in all equipment and software investment. Next “year is shaping up to be a tale of two halves,” according to the foundation: “A slow first half likely to be followed by improving conditions due to a strengthening housing sector and a reduction in policy uncertainty.”

But the foundation cautions that its 2013 outlook is largely contingent on the resolution of the fiscal cliff, “which could either continue to send negative shock waves through the economy or offer businesses encouragement.”