The latest report from the National Association for Business Economics (NABE) paints a pretty optimistic picture of the US economy, forecasting a markedly stronger pace of economic growth in 2015 and 2016 than was recorded last year.
The median forecast is for real GDP to increase 3.1% this year, followed by a 2.9% rise in 2016, compared to a gain of 2.4% in 2014.
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Healthier consumer spending, housing investment and government spending growth are expected to make outsized contributions to the projected acceleration in overall economic activity, observes NABE president and chief economist of Wells Fargo, John Silvia.
"Recent labour market strength is expected to continue. The median forecast is for net new job creation to average approximately 250,000 per month in 2015 and 216,000 per month next year. The unemployment rate is expected to continue its downward trend over the next several quarters, reaching 5% by the second half of 2016."
Inflation projections for 2015 have been revised downward amid a surging US dollar and plunging oil prices, adds NABE outlook survey chairperson Timothy Gill, who is also deputy chief economist of the National Electrical Manufacturers Association.
"The median forecast for the consumer price index is for a gain of less than 1%, while its median forecast for the core personal consumption expenditures deflator is for an increase of only 1.4%. The panel’s consensus calls for consumer price inflation to accelerate in 2016 as oil prices rebound and dollar appreciation slows."
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By GlobalDataYet the CNBC Rapid Update, which averages tracking forecasts from economists, fell after the government reported weaker than expected consumer spending in February. Consumer spending rose just 0.1%, less than economists had expected.
One survey participant – Stephen Stanley of Amherst Pierpont Securities – predicted zero growth in the first quarter, the lowest growth rate since the negative territory of the first quarter of last year, which was severely impacted by harsh winter weather.
Meanwhile, Federal Reserve chair Janet Yellen has pointed out that while the job market recovery has been substantial, there is "some way to go" before the economy reaches maximum employment. She said the Fed wants to see the unemployment fall to about 5%, that there are still too many people working part time jobs and that "wage growth continues to be quite subdued".
But William Sutton, president and CEO of the Equipment Leasing and Finance Association (ELFA) reckons the lease market is doing well overall.
"Our January monthly leasing and finance index reports new business volume is up 12% year over year, the Equipment Leasing & Finance Foundation’s March monthly confidence index showed industry confidence reached a four year high and the Foundation’s 2015 Equipment Leasing & Finance US Economic Outlook (released in December) projects continued steady growth in equipment and software investment.
"Equipment investment has been relatively modest in recent years, but picked up in 2014 and now seems poised to maintain this momentum into 2015. Overall, these trends portend a positive result for the equipment finance industry and the US economy."
He says the most significant development in this market over the last 12 months has been changes in accounting rules that would bring all or most leases on balance sheet, which have been under consideration by the accounting standards setters – the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB).
"In 2014, after assessing the feedback from their 2013 exposure draft, the FASB and IASB re-examined most of the significant aspects of the model. Despite disagreement between the two boards, the process of rewriting lease accounting rules continues to move forward. The stated goal is to issue a new standard some time in 2015 with a transition date of 2018."
According to Sutton, investment in equipment and software is expected to grow 6% in 2015, driven by a steadily improving economy. The economic outlook report forecasts that the US economy will see growth top 3% this year. ‘Bright spots’ identified in the report that bode well for above average growth include increased access to credit, lower oil prices and fiscal recovery.
According to ELFA’s 2014 survey of equipment finance activity, in 2013 banks comprised 53.6% of new business volume, captives 32.6% and independents 13.8%, percentages have remained fairly constant over the last few years. To put this in context, in 2009 banks accounted for 47.1% of new business volume, captives 31.4% and independents 21.5%.
According to the Equipment Leasing & Finance Foundation’s December report, the outlook for the 12 individual equipment and software verticals tracked in the report is mixed, with some sectors outperforming others. The report provides the following forecast:
– Agriculture machinery investment could see continued moderate declines over the next three to six months
– Construction machinery investment should moderate over the next two quarters
– Materials handling equipment investment growth may experience some moderation over the next three to six months
– All other industrial equipment investment will likely remain strong over the next three to six months
– Medical equipment investment growth is expected to be little changed over the next two quarters
– Mining and oilfield machinery will likely slow or potentially experience negative growth in investment over the next three to six months, given recent declines in oil prices
– Aircraft investment growth is expected to remain relatively stable over the next three to six months
– Ships and boats investment will likely see little change in the next two quarters
– Railroad equipment investment should moderate over the next three to six months
– Truck investment is expected to be little changed over the next three to six months
– Computers investment will likely experience relatively stable investment over the next three to six months
– Software investment will likely see a slight moderation in growth over the next three to six months
When asked whether the government has taken any direct or indirect action to support the lease finance industry, Sutton says there have been a myriad of state and federal government regulatory and legislative activities over the past year.
"Our industry touches every segment of the economy. ELFA is the industry’s principal advocate before federal and state policymakers, regulators and standard setting bodies. Maintaining relationships with policy makers who understand the equipment leasing and finance business allows us, on behalf of the industry, to advocate a proactive policy agenda at the state and federal levels."
Federal advocacy efforts are intended to achieve and maintain a legislative and regulatory regime that provides certainty and transparency for equipment financing transactions by preserving the tax, financial and business principles that underlie the equipment finance industry. The focal points for ELFA’s advocacy efforts at the federal level are congressional tax writing and financial services committees in the US House and US Senate, executive branch regulators and industry stakeholders who directly have an impact on the ability of the industry to compete.
ELFA leverages relationships with other associations when the need for a broader response arises, explains Sutton. "In 2015, we are engaging our members to ensure their voices are heard on public policy issues (from tax reform to Dodd-Frank) that have a direct impact on their companies, their communities, the broader equipment finance industry and the US economy. The association also actively monitors and engages state legislation and regulation that impacts the industry around the nation."
As well as reaching out to an external audience to encourage equipment financing, ELFA also supports industry members through business and professional development, advocacy and industry research. It provides multiple opportunities for the equipment leasing and finance community to network and learn via a variety of channels, including face to face conferences and workshops and web-based programmes.
He says ELFA members are optimistic about the prospects for the lease market in 2015. "Industry confidence reached a four year high in March. Confidence in the equipment finance market was at 72.1, an increase from the February index of 66.3 (a reading above 50 indicates optimism)."
Tony Taylor, international business development director BNP Paribas Leasing Solutions observes that the lease market in the US is outperforming Europe with new business volume expected to grow as demand for equipment purchases remains strong in segments such as construction, truck/trailer sales, rail, machine tools and medical equipment.
"The construction market continues to expand with new residential and commercial development. Equipment residual values in construction also increased, which reflects strong optimism in the market, although construction remains tied to the growth of the economy and low interest rates."
The Tax Increase Prevention Act of 2014 retroactively reinstated the limit on Section 179 to $500,000 as well as reinstating the 50% bonus depreciation through to the end of 2014, which Taylor observes gave lease the industry a significant boost during 2014.
The Section 179 limit was reduced to $25,000 from 1 January 2015 and no bonus depreciation is available for the 2015 tax year, although there is a possibility that the expanded limits could be restored by Congress during 2015.
"BNP Paribas Leasing Solutions developed a joint marketing programme with Bank of the West in 2012 and we continue to develop the market with new products, such as stocking and wholesale finance," Taylor adds. "We have managed to grow our business strongly year on year since 2012 and are confident we will do the same in 2015."
Danny Lam, chief operating officer Societe Generale Equipment Finance USA acknowledges that the lease market has benefited from relatively low interest rates and overall a high level of confidence in the economy.
"While certain segments (notably construction) have grown faster than others, we are satisfied and pleased with the overall growth we have experienced over the last 12 months and we expect to see continued but modest growth in the overall market in 2015. Generally speaking, the construction market has shown good growth recently largely due to the increase in housing starts, non-residential developments and infrastructure projects. While overall growth in high-tech is modest, we have seen growth in cloud-based financing activities."
Lam refers to bank owned lessors growing their market share and says his company has been active in refining its cloud-based financing solutions products.
"We are also starting to explore additional residual based products and services and remain optimistic about 2015 as the economy shows moderate but steady growth, there is a continued increase in new jobs and consumer confidence is high, while the stock markets continue to reach record levels."
The prospect of increasing interest rates should spur investment as businesses try to lock in financing rates and the improving market condition will continue to help solidify credit performance. That is the view of Thomas Moosey, leasing products manager for GE Capital’s commercial lending & leasing business in the USA.
"This is poised to be a breakout year for the US economy, with growth expected to top 3% for the first time since 2005. In 2014, real GDP grew by 2.4% according to the US Bureau of Economic Analysis and capital spending on equipment rose 6.5%. Steady strengthening in the labour market continued and it is expected that the FASB and IASB will issue a final standard regarding changes in lease accounting."
On the subject of direct or indirect actions taken by the US government to boost leasing activity, Moosey refers to the Federal Reserve concluding its bond purchases (known as quantitative easing or QE3) in October 2014, before turning its attention to a potential interest rate increase, which is expected in the third quarter of this year. "This will be watched closely as the economy is expected to continue to improve."
He expresses optimism about the prospects for the lease market in 2015. "A key indicator for the equipment lease market is equipment cap-ex – the amount businesses are spending on equipment such as construction machinery, trucks, machine tools and information technology. Assuming the US economy continues to improve, business confidence will improve and equipment cap-ex will increase."
