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U.S. Economy: A Balancing Act of Tailwinds and Headwinds

July 17, 2013, 07:00 AM
Topic: Economy

The Equipment Leasing & Finance Foundation recently published its quarterly U.S. economic and equipment sector outlook in partnership with Keybridge Research. At first glance, the latest forecast of 2.0% GDP growth in 2013 may sound familiar – the U.S. economy has averaged just over 2.1% growth over the past three years.  However, this time we believe things are indeed different. In fact, as the Foundation report states, although growth remains subpar, “the U.S. economy is generally in its strongest position since the 2008-09 recession.”  In other words, while the underlying U.S. macro trends are quite strong, several factors are slowing growth. These competing macro forces affect our outlook for the equipment sector – the Foundation Outlook calls for a relatively slow second quarter followed by an acceleration in the second half of the year, with overall annual growth of about 4.8% in equipment and software investment.

The narrative for the U.S. economy is a balancing act of tailwinds and headwinds. On the positive side, the housing market is showing remarkable strength, cheap natural gas is leading to major investments in manufacturing, auto sales are rebounding, and hiring appears to be gaining traction. All else equal, the housing sector alone could add a full percentage point to GDP growth and to add 20,000 to 30,000 jobs per month in 2013 and 2014. However, high oil prices, weak global growth, and U.S. fiscal consolidation are all slowing growth. The U.S. economy typically averages 3.0% annual growth, and by our estimation, the net balance of these positive and negative forces should slow growth to about 2.0% for the year.  This is in line with the latest consensus views.

Given the steady improvement in the economy but lack of break-out growth, monetary policy could be a bit of a wild card in late 2013. As witnessed over the past month, comments by Federal Reserve Chairman Ben Bernanke rattled the market and sent the 10-year Treasury rate from about 2.2% to above 2.6% (as of 7/10/13). An increasing number of economists, including Keybridge, welcome a scaling back of the Fed’s quantitative easing program as there is increasing sensitivity to the idea that the potential risks of overly aggressive monetary policy outweigh the benefits. Additionally, marginally higher interest rates are unlikely to be a noticeable deterrent for business investment or for the housing recovery.

Business investment led the U.S. recovery for much of 2010 through 2012, but the pace of growth has slowed recently. After a significant round of productivity-enhancing capital spending in the early stages of the U.S. economic recovery, equipment & software investment is now more likely to grow at a historically normal rate (about 6% annually). Within total equipment & software investment, the Foundation Outlook highlights six key verticals discussed in more detail below:  agriculture equipment, computers & software, construction equipment, industrial equipment, medical equipment, and transportation equipment.

Agriculture Equipment

  • Investment jumped sharply over the past two quarters, but it remains down 10% on an annual basis.
  • Farm income is up noticeably but has not yet translated into stronger farm machinery shipments, which are about flat year-over-year.
  • Overall, the data point to flat annual growth for 2013.

Computers & Software

  • Growth has been slower over the past several quarters (averaging 4.0% year-over-year) after accelerating in late 2011 and early 2012.
  • Shipments and new orders for computers and storage devices fell in May, suggesting a relatively weak Q2, broader macroeconomic trendsare expected to lift growth to a more typical range of 5% to 8% later in the year.

Construction Equipment

  • Investment in construction equipment has increased rapidly after the 2008-09 collapse, averaging 38% annual growth over the past 12 quarters.
  • The rebounding housing sector and mining activity have and should continue to drive demand for road and infrastructure construction.
  • Construction machinery shipments dipped in April and May.  However, a jump in new orders suggests that the sector will continue to grow rapidly throughout the year.

Industrial Equipment

  • Industrial equipment investment tracks closely with the broader economy.  Accordingly, it will be difficult for this vertical to achieve sustained rapid growth without a stronger macroeconomic recovery.
  • Industrial machinery shipments are down and new orders are up about 1% so far in Q2.
  • Multiple factors support “reshoring” of U.S. manufacturing, which should bode well for industrial equipment over the mid- to long-term; but short-term growth is likely to be in the range of 1% to 3% year-over-year.

Medical Equipment

  • This vertical has posted two consecutive quarterly gains after falling about 5% in mid-2012.
  • Key leading indicators, including hospital in-patient days and medical & diagnostic lab prices, are noticeably down year-over-year, while revenue of nursing & residential care facilities is growing at a subpar rate.
  • Overall, zero to weak annual growth are expected over the next three to six months.

Transportation Equipment

  • In Q1, shipments of automobiles and light trucks grew rapidly; nondefense aircraft were up slightly; and heavy duty trucks, defense aircraft, and ships & boats all contracted.
  • Q2 is looking slightly better, with nondefense aircraft shipments getting a significant boost in May, and ships & boats increasing as well.  Defense aircraft are about flat from Q1 to Q2, and heavy duty trucks shipments remain in a contractionary phase.
  • Overall, the Foundation Outlook anticipates below average growth (2% to 5%) over the next three to six months.
Adam Karson
Director | Keybridge Research, LLC
Adam Karson is a director at Keybridge Research LLC, where he specializes in international economics and finance. Karson heads Keybridge’s economic outlook and forecasting service offering, including providing regular macroeconomic and industry-level analysis for the Equipment Leasing & Finance Foundation. With more than a decade of experience in economic consulting and financial markets, Karson has a strong track record of providing economic advisory services to help improve businesses’ strategic decisions across multiple markets in the U.S., Europe, and the Middle East. He holds a Bachelor’s degree, with Honors, in Economics from Johns Hopkins University and a Master’s degree in Public Policy from Duke University.
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