Equipment Growth Hangs on Fiscal Cliff

Although U.S. equipment and software investments are expected to grow in 2013, they will be at a below-average rate of less than 3%, hampered by weak demand and fiscal uncertainty, according to the Equipment Leasing & Finance Foundation.

The outlook for investment in 2013 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, the foundation reports in its 2013 Equipment Leasing & Finance U.S. Economic Outlook.

Even once the fiscal challenges are resolved, it will take time to work out the details and for businesses to regain confidence, the foundation says. But growth in equipment and software investment is expected to begin to regain momentum in the third and fourth quarters of this year.

"The 2013 Equipment Leasing & Finance U.S. Economic Outlook projects positive but muted growth in equipment investment through the beginning of 2013, as policy uncertainty continues to weigh on business confidence," said William Sutton, president of the foundation and also president and CEO of the Equipment Leasing and Finance Assn. "However, if policymakers find a solution to key fiscal issues, we expect businesses will feel more confident in the second half of the year, leading to increased equipment investment."

Looking specifically at industrial equipment investment, growth is expected to continue, but at a slower rate than in recent quarters. Year-over-year growth in the sector slowed from just over 13% in the second quarter of 2012 to 4.5% in the third quarter. This was foreshadowed by weaker industrial production, stagnating capacity utilization, and only slight gains in manufacturing new orders, the report explains.

Opposing tensions are creating different short- and long-term dynamics in industrial equipment. In the near term, capacity overhang from the recession and heightened policy uncertainty are stunting investment. In the longer term, the "reshoring" of U.S. manufacturing will drive demand. Depending on the outcome of the fiscal cliff debate, manufacturing could drive stronger growth in the second half of 2013.

Domestic political risk is the major concern on the radar for 2013. The report calls for the U.S. economy to grow at a rate of 2.4% once major fiscal issues are resolved. Without a smooth solution to current fiscal challenges, growth is forecast to fall significantly below 2%.
Equipment and software investment took a significant hit in Q3 2012, declining 2.7% (annualized rate) after a 4.8% increase in the second quarter. The data suggest that businesses have essentially "hit the pause button" on investment until there is a resolution to the fiscal cliff.

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