Equipment and software investment growth slowed in early 2023, resulting in the Equipment Leasing & Finance Foundation lowering its annual forecast for investment growth to 1 percent, according to the Q2 update to the 2023 Equipment Leasing & Finance U.S. Economic Outlook.
“Despite the U.S. economy ending 2022 with healthy growth and maintaining some momentum into early 2023, equipment and software investment softened to 2 percent annualized growth in Q4 and remains under pressure," said Nancy Pistorio, foundation chair and president of Madison Capital. "The economy is still above water, but most indicators point to slowing growth, and many economists continue to expect a recession to begin later this year. Should that come to pass, I also expect the equipment finance industry will demonstrate its characteristic resilience, innovation, and resolve, and will continue to serve the financial needs of our customers regardless of the economic climate.”
The report released today also predicts sluggish economic growth in Q1 as the economy edges closer toward recession, which the foundation continues to expect will begin during the second half of the year. Overall, annualized economic growth is forecast to be 0.7 percent in 2023, largely driven by a solid jump-off point at the end of last year.
The foundation's report is focused on the $1.16 trillion equipment leasing and finance industry and highlights key trends in equipment investment, placing them in the context of the broader U.S. economic climate.
Highlights from the Q2 update to the 2023 Outlook include:
- Equipment and software investment growth was sluggish in Q1 as the combined effects of a slowing industrial sector and higher interest rates weighed on equipment demand. While certain end-user markets may fare better in the months ahead, a broad economic downturn will drag on investment across the board, resulting in an annualized growth forecast for equipment and software investment of just 1 percent.
- The U.S. economy is expected to continue to soften despite a healthy labor market, lower energy prices and supply chain improvements. Stubborn inflation combined with rising consumer financial stress and a looming debt ceiling showdown will add to financial sector woes. Although a “soft landing” scenario is still achievable, a mild recession is likely, beginning during the second half of 2023.
- The manufacturing sector has worked through much of its pandemic-era supply chain backlogs, but measures of supply chain health indicate the industrial sector is in the midst of a protracted slowdown. On the plus side, the sector’s jumping-off point was strong, so while demand is likely to continue to soften this year, the downturn may not be as severe as in past cycles.
- Main Street businesses suffered the worst effects of pandemic-era labor shortages, and labor-saving investments in equipment and technology continue to be a lifeline. However, loan availability is expected to tighten following recent bank failures, making financing investments more difficult and adding to small business financial stress.
- The Federal Reserve continues to battle inflation, even raising interest rates immediately following the second and third largest bank failures in U.S. history. Interest rates are expected to rise higher than most market-implied forecasts expect this year as the Fed targets an inflation rate of 2 percent.
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 the U.S. macroeconomic outlook, credit market conditions, and key economic indicators. The Q2 report is the first update to the 2023 Economic Outlook, and will be followed by two more quarterly updates before the publication of the 2024 Economic Outlook in December. The full report can be found here.