Equipment Investment: A Review & Forecast 2018/19

Written by Tyler Magnuson, MDNA Member Firm, Hilco Valuation Services, LLC 

Published on February 18, 2019

Earlier this month, the Equipment Leasing and Finance Association published their report forecasting the 2019 Equipment Market. The report concluded that “Equipment investment jumped by nearly 8% overall last year but tailed off toward the end of the year. The total is expected to grow by just more than 4% in 2019.” What’s more, “The most recent Manufacturers’ Outlook Survey from the National Association of Manufacturers showed 2018 as the best year ever for manufacturer optimism” (Moutray). Despite this optimism, we saw equipment investment trail off in Q4 2018. Why? The primary driver is believed to be economic uncertainty. With financial conditions tightening and growth slowing down, investors were becoming more and more concerned about a possible recession – which left the Federal Reserves’s foot hovering over the economic brakes. But in order to understand how this all affects equipment investment, we must look into the Fed’s goal of price stability and furthermore, its implications.

Price Stability

One of the Federal Reserve’s main objectives is price stability, which entails keeping inflation at around 2% per year. When it looks like the economy is strong enough that inflation could threaten to exceed 2%, and therefore price stability, the Fed tries to head it off by slowing economic growth. This is called contractionary monetary policy, and it is achieved through raising short-term interest rates. By doing so, the Fed increases the cost of borrowing and effectively reduces its attractiveness.

Think of housing, for instance. If mortgage rates go up, then you will be less inclined to take out a loan to purchase a home. The same concept can be applied to businesses. As short-term interest rates increase, companies’ willingness to borrow decreases. Less borrowing means less money spent on equipment, land, R&D and, ultimately, the economy. The goal here is to prevent the economy from overextending itself. If done just right, it can act as a brake on inflation. Done too aggressively, it can trigger a recession.

The Fed’s Position

In 2018 the economy was growing rapidly, and the unemployment rate was falling. Historically speaking, a growing economy with falling unemployment should yield high inflation down the line. Based on this, the Federal Reserve raised interest rates four times in 2018. All said and done, they hiked interest rates from 1.5% to 2.5%. However, a rise in inflation never came. Instead, inflation started falling, and when it was done, it had fallen below the Fed’s target of 2%. In December, the Fed rose interest rates for the last time. They also forecasted two more increases over the course of the upcoming year.

However, the Fed revised this projection after its most recent meeting. In conclusion of that meeting, Chairman Powell announced that the Fed’s policy stance is “Appropriate” and that the “Policy rate is now in the range of the committees estimate of neutral” Which meant that at the current rate we were neither speeding up nor slowing down economic growth. Getting back to “neutral” was vital for the Fed because it allowed them to put financial crisis in the rear-view and begin focusing their attention elsewhere. More importantly, this implied that the Fed was no longer in the business of tightening monetary policy.

Outlook 2019

Despite their trepidation in 2018, the Fed’s threat of increased interest rates has subsided. Coupled with sound economic growth and a healthy rate of inflation, we can expect to see equipment investment pick back up in 2019. With market confidence up, businesses have shown a greater willingness to move on large capital purchases. Chad Moutray, chief economist for the National Association of Manufacturers, wrote an article stating “Today, about nine in 10 [sic] manufacturers are optimistic about the future, and other sentiment releases have reflected similarly positive assessments. Manufacturing leaders feel upbeat about future growth in new orders, output and employment.”

Written by Tyler Magnuson, from MDNA Member Firm, Hilco Valuation Services, LLC 

 

Works Cited:

Szal, Andy. “Equipment Investment Expected to See Continued Growth in 2019 [Report].” Thomas For Industry, 04 Feb. 2019, 

Moutray, Chad. “Manufacturers are gung-ho for 2019 – for good reason.” The Hill, 08 Jan. 2019,