U.S. equipment and software investment is projected to expand by just 1.1 percent in 2020 while the country’s economic growth is expected to slow to 1.7 percent according to the 2020 Equipment Leasing & Finance U.S. Economic Outlook, published 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, the report said, weighed down by the first annualized contraction in over three years in Q3 2019.
Several headwinds highlighted in the 2019 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.
Here are several key expectations from the 2020 Economic Outlook.
Uneven growth. 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 labour 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.
Muted capital investment. 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.
Federal Reserve rate cutting. 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, the Outlook expects the Fed to cut the federal funds rate twice in 2020.
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:
• Agriculture machinery investment growth is likely to improve;
• Construction machinery investment growth should increase moderately; and
• Materials handling equipment investment may expand.
All other industrial equipment investment growth should remain moderate. In other sectors:
• Medical equipment investment growth is expected to improve;
• Mining and oilfield machinery investment growth could improve modestly;
• Aircraft investment is likely to remain in negative territory;
• Ships and boats investment growth are expected to remain weak;
• Railroad equipment investment growth is likely to soften;
• Trucks investment growth is expected to weaken;
• Computers investment growth will likely remain weak; and
• Software investment growth should remain solid.
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.
“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 CEO of Ivory Consulting Corporation. “However, a strong labour market and a 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.”