The most comprehensive research to date, the U.S. Equipment Finance Market Study — released on December 18, 2007 and commissioned by the Equipment Leasing & Finance Foundation — underscores the equipment finance sector’s role in the U.S. economy. This study reveals the most accurate picture yet of the domestic equipment finance sector: of the $1.1 trillion invested in plant, equipment and software in 2006, 55%, or $600 billion, was financed through loans, leases and lines of credit. The U.S. Equipment Finance Market Study was conducted by Global Insight, Inc.
Lisa Levine, executive director of the Equipment Leasing & Finance Foundation, asserts, “Publication of this seminal study provides hard evidence that the equipment finance sector is a significant contributor to capital formation in the U.S. economy. Just as important, the data further illustrates what U.S. businesses already know — equipment financing provides the means by which they are able to acquire productive assets efficiently and affordably.”
In early January 2007, following the trends of equipment finance company product offerings, the foundation, along with the Equipment Leasing and Finance Association (ELFA), saw the need to “define the universe” of the equipment finance sector — to gain an understanding of the industry’s true importance to the U.S. economy and to uncover opportunities in the larger marketplace. Every year American businesses, nonprofits and government agencies spend in excess of $1 trillion in CapEx (or fixed business investment) and the foundation wanted to find out how much of that was financed. The goal for the study: to understand how equipment acquisition is financed and to gain insight into the current state of the industry with a look at the short-term outlook for the equipment finance sector.
“We are pleased to work with Global Insight, Inc., a leading economic forecasting firm, to conduct this study” Levine says. Global Insight, Inc. is a privately held company that brought together the two most respected economic information companies in the world, DRI and WEFA. Global Insight is recognized as the most consistently accurate forecasting company in the world.
To conduct this study, Global Insight cross-referenced various public and proprietary databases and conducted a survey of more than 472 businesses that acquired equipment in 2006. A combination of comprehensive data from proprietary, government, corporate and industry sources was used to conduct the study, including selected interviews with ELFA members. Because much of the data provided by survey participants contained sensitive company-specific information, the results have been aggregated in the study, to ensure confidentiality. By collecting responses on the purchases and financing methods of businesses by end-user, the research indicates this sector is significantly larger than previously estimated.
Study Findings — Why It’s Groundbreaking
What Does This Mean to the Industry and Those Monitoring It?
We know the equipment finance sector is large and important to the U.S. and global economy. The U.S. Equipment Finance Market Study illustrates the impact of the financing of capital expenditures and business fixed investment on the economy. The $1.1 trillion is a huge driver in the commercial economy and the ability to finance it clearly impacts the growth of the economy. The study identifies finance volume by industry and by equipment type. Understanding the tendencies of major industries to utilize equipment finance in combination with the propensity for certain equipment types to be financed, provides one of the necessary building blocks to identify opportunity in the market. To operate and grow their companies, businesses finance equipment — if they couldn’t do this, they could not grow their businesses and it would directly impact income demand and employment.
In 2007, the ELFA MLFI-25 (Monthly Leasing and Finance Index) positioned the equipment finance sector as a leading indicator of the health of the U.S. economy. The U.S. Equipment Finance Market Study gives further support to this claim by tracking the amount of overall investment in equipment, the level of liquidity in the marketplace, and cost of capital. The health of the U.S. economy directly impacts the decision by U.S. business — both large and small — to invest in plant and equipment. The study provides fresh evidence for businesses, analysts, policymakers and others to support the notion that this demand contributes significantly to economic activity and is the underpinning for a healthy commercial marketplace.
Each year, the foundation publishes the annual State of the Industry Report (SOI). This year, the U.S. Equipment Finance Market Study not only includes the usual look at the “state of the industry,” but also contains many new charts detailing findings from the new study. Readers can expect to find an analysis and commentary on the industry trends, the competitive environment, accounting and regulatory issues, and relevant business performance metrics.
What the Future Holds
The equipment finance sector is a sound, stable industry, and the data continues to show strong portfolio quality and historically low delinquencies and charge offs. All the while, demand has been steady. Global Insight anticipates that the troubles in the housing market will have some spillover to business fixed investment, largely resulting from the lower growth rate of final demand in 2008. We are in the commercial lending business … recent improvement in the commercial paper market suggests that the economy will not be hit by a full-blown corporate or small business credit crunch but the risk is still present.
If the economy slows down in 2008, Global Insight expects that economic growth will continue to be positive and remain in the 1-2% range until the third quarter of 2008. The firm predicts a moderate gain in growth next year. Overall equipment finance volume is expected to rise 5.1% next year, slightly ahead of expansion in equipment investment. The equipment finance industry will be well positioned to meet the needs of businesses as the economy emerges from its housing-related doldrums in 2008.
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