Investment in equipment and software is projected to expand 1.1% in 2020 while U.S. economic growth slows to 1.7%, according to the 2020 Equipment Leasing & Finance U.S. Economic Outlook released today by the Equipment Leasing & Finance Foundation. After decelerating over the course of 2019, the U.S. economy is poised to soften further in 2020. Equipment and software investment is likely to post its weakest year of growth since 2016, weighed down by the first annualized contraction in over three years in Q3.
Several headwinds highlighted in last year’s Economic Outlook began to stunt growth in the second half of 2019 and are expected to continue dragging on business confidence and investment in early 2020.
“After robust growth in 2018, equipment and software investment slowed markedly throughout 2019 and contracted in the third quarter as the effects of unresolved trade tensions and a slowing global economy took hold,” said Scott Thacker, Foundation Chair and Chief Executive Officer of Ivory Consulting Corporation. “However, a strong labor market and still-confident U.S. consumer base should keep the broader economy above water, even as investment in several key equipment verticals slows or remains weak.”
The U.S. economy saw uneven growth over the course of 2019 but ultimately decelerated from its 2018 pace. Consumers supported the economy throughout the year, buoyed by the strongest labor market in a generation and faster wage growth. However, political uncertainty, tariffs and a slowdown in growth in several key trading partners have weighed on U.S. exports and business investment. These headwinds show few signs of abating, which should lead to another year of decelerating economic growth in 2020.
Capital investment contracted for two consecutive quarters in 2019 and is expected to remain muted in early 2020, in large part due to the ongoing trade war with China and other slowing economies around the world. Despite weak or negative investment growth and faltering business confidence, credit market conditions remain broadly healthy.
Financial stress, while up slightly, remains subdued by historical standards and credit supply, while slightly tighter, is still not cause for concern. However, demand for credit — especially by businesses — has weakened notably, which may portend a further slowdown in business investment in 2020.
After adopting a wait-and-see approach to monetary policy in the first half of 2019, the Federal Reserve cut its benchmark policy rate three times in the second half of the year in an effort to insulate the U.S. economy from the effects of trade headwinds, industrial sector weakness, and a global economic slowdown. Given the Fed’s demonstrated willingness to cut rates proactively in the face of economic weakness and the expectation of weaker macroeconomic fundamentals, we expect the Fed to cut the federal funds rate twice in 2020.
Monitoring Investment Momentum
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. Several equipment verticals should expect their growth outlook to remain steady in the first half of 2020.
Over the next three to six months:
- Construction machinery investment growth should increase moderately.
- Materials handling equipment investment may expand.
- Agriculture machinery investment growth is likely to improve.
- All other industrial equipment investment growth should remain moderate.
- Mining and oilfield machinery investment growth could improve modestly.
- Trucks investment growth is expected to weaken.
- Railroad equipment investment growth is likely to soften.
- Aircraft investment is likely to remain in negative territory.
- Ships and boats investment growth are expected to remain weak.
- Computers investment growth will likely remain weak.
- Software investment growth should remain solid.
- Medical equipment investment growth is expected to improve.
The Foundation produces the Equipment Leasing & Finance U.S. Economic Outlook report in partnership with economic and public policy consulting firm Keybridge Research. 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 report will be updated quarterly throughout 2020.
Download the full report at https://www.leasefoundation.org/industry-resources/u-s-economic-outlook/.