Phelan agrees the economic shift is already affecting the equipment finance industry saying, “Over the past fourteen years, we’ve seen a shift where today there are more private companies involved in the service economy than in the big three –manufacturing, transportation and construction. The other big shift is in the asset types financed – shifting from hard assets to softer assets. We conducted studies on this shift and found that price points for soft assets typically found in the information technology asset classes – including servers, firewalls, and software have fallen dramatically. However, our research shows that the rate of investment in soft assets has grown faster than in hard assets over the past three years. The shift towards soft assets reflects the broader trend towards more technology in business.”
This shift toward soft asset investment is further supported by additional data gathered by PayNet. According to the company’s research, investment in manufacturing capital equipment fell 2% in the first quarter of 2014 versus the first quarter of 2013. For the 12-month period ending March 2014, the big sub-group of Industrial Machines decreased capital investment 15%. Manufacturers of electronics and instruments are also experiencing a decline in equipment investment with a decline of 10% in PP&E year-over-year.
However, there are a few other bright spots beyond soft assets according to Phelan. “Our data shows the pent up demand in the housing sector is leading to investment by manufacturers of wood, lumber and furniture products where capital investment is up 14%. Additionally, chemicals, petroleum and coal producers are investing fairly heavily – demonstrating 10% growth,” stated Phelan. He added, “Another bright spot is in food manufacturing where the cultural change towards non-allergenic and health foods is positively impacting capital investment in this sector where we are seeing more startups and high-growth companies in the food manufacturing industry.”
Outlook for the Equipment Finance Industry
According to Phelan, the conditions are right for continued expansion. He wrapped up our discussion commenting, “We are confident we will continue to see growth over the next quarter. We don’t see the trend line changing quickly – it won’t just turn on a dime. It’s a big economy and the trajectory will not change quickly. What we see is that consistency will likely continue in the trend line and steady growth will continue, which will ultimately be good for the equipment finance industry for at least the next two quarters.” He added one final comment, “Equipment finance CEO’s should understand the current stage of the business cycle. This current expansion phase of the cycle is not booming, it is more like a “boomlet”. Although credit risk did show a slight uptick in delinquencies during the first quarter, our delinquency index reflects movement to acceptable risk taking. This level of delinquency is a good indicator of medium and small companies’ appetite for taking on more debt. So with credit risk this low, it’s a real positive for businesses and the equipment finance companies that lend. Absent a crazy global or financial event, the odds are this expansion and low risk phase of the business cycle will continue for 2014.”
To review the April 2014 Thomson Reuters/PayNet Small Business Lending Index (SBLI), click here.