After severe declines in equipment and software investment in Q1/20 and Q2/20 due to the effects of the COVID-19 pandemic, investment in equipment and software bounced back in Q3/20 as the U.S. economy began to reopen, according to the 2020 Equipment Leasing & Finance U.S. Economic Outlook from the Equipment Leasing & Finance Foundation. While a great deal of uncertainty remains as the pandemic continues, annualized growth appears likely to remain positive in Q4/20, bringing the annual equipment and software investment growth forecast to the -4.9% to -6.4% range. The forecast for the broader U.S. economy in Q4/20 is less certain, although annual U.S. GDP growth for 2020 is forecast between -3.8% and -4.8%, according to the Q4/20 update to the outlook.

“This update is arguably one of the most important outlooks the foundation has published,” Scott Thacker, chair of the ELFF and CEO of Ivory Consulting, said. “There has been much uncertainty about the actual economic performance in Q3 and also about how quickly the economy will rebound in Q4 and beyond. This outlook will be highly useful in explaining Q3 results and in giving a hint about how the year will finish. I am encouraged to see equipment and software investment in Q4 being forecast as positive, with nine out of 12 verticals that the foundation monitors showing improvement.”

Highlights From the Q4 Update

• Equipment and software investment is forecast to grow between 0% and 10% (annualized) in Q4/20.
• The contraction in the U.S. economy in Q2/20 was unprecedented, with high-contact service industries bearing the brunt of the damage. Although Q3/20 growth will set records, the unpredictable nature of the public health crisis is clouding Q4/20 GDP projections. Labor market health and the availability of federal stimulus will be critical factors to watch, as will the pandemic’s trajectory. Growth will suffer if another wave hits.
• The U.S. manufacturing sector has bounced back more quickly than expected. Although a shade more than half of the 1.4 million lost manufacturing jobs have returned and job growth was relatively modest in September, other industry indicators such as shipments and new orders suggest that the manufacturing sector will strengthen in late 2020 and early 2021.
• On Main Street, a fork has emerged in the road to recovery. A majority of small firms are managing to get by for now. Some — perhaps 10% to 20% — have been minimally impacted by the recession and are thriving. At the same time, a sizable and growing minority of firms are at heightened risk of closing their doors for the foreseeable future.
• The Federal Reserve has continued its massive quantitative easing program in 2020, and financial markets have responded favorably. Meanwhile, the Federal Open Market Committee has unveiled a new policy framework that will allow inflation to run above the usual 2% target for some time.

The Foundation-Keybridge U.S. Equipment & Software Investment Momentum Monitor, which is released in conjunction with the economic outlook, tracks 12 equipment and software investment verticals. In addition, the Momentum Monitor Sector Matrix provides a customized data visualization of current values of each of the 12 verticals based on recent momentum and historical strength. Momentum readings are below the five-year average in all 12 verticals, and nine of 12 verticals are accelerating. Over the next three to six months:

• Agriculture machinery investment growth may have hit a turning point and should begin to improve.
• Construction machinery investment growth is likely to remain weak, but recent movement is encouraging.
• Materials handling equipment investment growth is likely to continue contracting.
• All other industrial equipment investment growth is likely to rebound.
• Medical equipment investment growth should continue to improve.
• Mining and oilfield machinery investment growth may improve, although the global recession is likely to remain a significant headwind for energy demand.
• Aircraft investment growth is likely to remain negative.
• Ships and boats investment growth is likely to remain in contractionary territory, but recent movement is encouraging.
• Railroad equipment investment growth may improve modestly.
• Trucks investment growth may have bottomed out and appears likely to improve.
• Computers investment growth should remain solidly positive.
• Software investment growth should continue to strengthen.

The ELFF produces the Equipment Leasing & Finance U.S. Economic Outlook report in partnership with Keybridge Research, an economic and public policy consulting firm.