Full Disclosure
The 2012 first quarter GDP figures are in and they are a disappointment, at 2.2%, even lower than the 4th quarter of 2011. For details, you can view the following report , GDP Growth Slows in First Quarter, which was issued by the Bureau of Economic Analysis. Very few businesses are unaffected by this sluggish economy and therefore, not surprised by this report.
“There has been a decrease in the percentage of businesses that finance their equipment acquisition.” I stated in an article that I contributed to the April 2012 issue of Ingram’s, Kansas City’s Business Magazine. Titled “Lease or Purchase?, Making the Right Call”, I explained, “Traditionally, about two thirds of all equipment sold in this country is leased or financed in some way. Currently, that percentage is down to about half, but isn’t likely to stay there for long.”
To what, you might ask, do I attribute this optimism? While some ponder the significance of the $119M sale price of “The Scream”, it is probably better to depend on more substantive data & experience.
Record low interest rates have kept the economic engine at a slow idle. Even though these rates have enabled businesses to access a lower cost of funds, the flip side of the equation is that their cash accounts are better used to pay for necessary equipment expenses. The key word here is “necessary”.
In talking to customers, I have found that businesses that plan to expand are waiting for the right time to make their move, and will enter the credit markets when they feel comfortable. There is pent up demand for equipment that will allow for growth and expansion.
The President of the Equipment Lease & Finance Industry, William Sutton, issued a measured projection in a Reuters article, February business volume up in year, down in month, which supports this observation.
“Caution about events spanning from Europe's economy to the U.S. presidential election and oil prices is holding many businesses back from materially stepping up equipment investment for expansion rather than for replacement.”
Companies signed up for $5.0 billion in loans, leases and lines of credit in February, 22 percent more than $4.1 billion a year earlier, but 2 percent below January's $5.1 billion, ELFA said.
"In areas of business process improvement, efficiency, automation, healthcare IT, there are anecdotally signs of expansion," Sutton said.
The group, which reports economic activity for the $628 billion equipment finance sector, expects economic improvement to be steady but slow.
Many of the factors responsible for the sluggish economy will be coming to a head within the next 3-6 months and be resolved one way or another. Let’s hope that the second or third quarter will show an improvement in the GDP. The demand for funds to finance growth & expansion may be one of the leading indicators.
Kevin F. Clune, CLP
