Sound executives need to know the environment in which they operate and the potential challenges to market fundamentals. As the old saying goes, “the only constant is change,” and the accelerated pace of technological innovation is a prime example. From Michael Douglas’ “brick” phone of 1987 Wall Street fame to today’s iPhone and Android devices which are more powerful than our first home computers, times have changed.
Personally, trying to understand industry trends is crucial to adapting a tactical approach to execution of strategic plans on a continual basis. In that regard, I recently read an insightful Equipment Leasing and Finance Association article that discussed the top equipment acquisition trends for 2016 and have a few thoughts.
U.S. investment in equipment and software will hit a new high, but moderate in growth as businesses hold back on spending.
The widely-held definition of a recession is two consecutive quarters of GDP decline. But measuring industrial production, which fell four of the past six months and declined 1% from February ’15 to February ’16, may tell a different story. There is softness in the U.S. economy which may make even moderate growth a lofty expectation.
End of zero interest rate policy will spur other businesses, particularly small businesses, to invest before rates go higher.
The end of the zero interest rate environment, with a small Federal Reserve bump, quickly gave way to the negative interest rate environment globally. From my vantage point, which admittedly only offers a narrow view, the bump had no impact on market pricing, except perhaps to accelerate rate competition.
The growth of equipment acquired through financing will increase solidly, but more slowly.
Especially in the transportation sector, with which I have a degree of familiarity, the equipment replacement cycle feels long in the tooth. My crystal ball is as cloudy as normal, though slow growth is what I anticipate.
Businesses will begin preparing for new lease accounting rules.
As adoption of the new rules draws near, the impact won’t only be on corporate balance sheets, which will appear more highly levered without off balance sheet lease treatment. The fact is that a thorough analysis of a client’s financial condition necessitates the inclusion of off balance sheet liabilities and the related cash flow obligations. Widespread financial covenant rewrites will be common, but the overall impact should be negligible.
Equipment investment will vary widely by industry vertical.
Linked to the industrial production decline noted earlier, is the variation in equipment investment by vertical. Energy, mining and utilities have experienced the greatest decline, while we should expect to see growth in healthcare and housing.
Low oil prices will continue to impede energy investment.
Lower for longer is my view and my expectation in working with clients and prospective clients in the energy sector. Those who have managed through the commodity cycle previously, perhaps more than once, know that it’s painful for all to take the necessary action to survive. But for those that manage through the trough will emerge stronger as prices rebound and, unless there’s an unknown fossil fuel replacement around the corner, energy prices will improve.
Eyes will be on 2016 presidential election for potential policy shifts.
National election years are interesting indeed, and this year has been no exception. Though change will come next January, by the time the party conventions nominate their candidates and the full court press for the presidency begins late summer, the year will be baked for most and eyes will turn toward 2017.
Looming “wild cards” could influence business investment decisions.
Against the backdrop of global geopolitical and economic uncertainty, a shock to the system is always possible and rarely foreseen, though obvious with hindsight. I don’t know what may affect the slow growth that I anticipate, but it’s important to remain vigilant and flexible.