Though capital spending on equipment and software is expected to pick up in 2017, growth in financed equipment acquisitions is projected to dominate growth in total equipment investment, according to the Equipment Leasing and Finance Association (ELFA).
Pro-business federal policy and a push to allocate money to infrastructure projects has improved manufacturers’ sentiment about the economy, though both exporters and importers are watching the ramifications of an aggressive trade policy carefully. Tax policy is another issue manufacturing companies are eyeballing as Congress stumbles and bumbles its way through major overhaul proposals. President Trump says progress is being made behind closed doors, but media coverage is much less rosy. An executive order instructing federal agencies to look for redundant, onerous and unnecessary regulation is being implemented, and the upshot could be a reduced regulatory burden on manufacturers, which may then pursue production opportunities previously shelved or put on hold.
The ELFA’s president and CEO, Ralph Petta, said in a statement earlier this year, “Equipment acquisition continues to drive the supply chains across all U.S. manufacturing and service sectors.” He pointed to the crucial role of leasing and financing to fund the majority of U.S. business acquisitions of productive assets.
Analyzing ELFA data, industry expertise, and association member input from meetings and conferences, the ELFA spotlighted 10 trends it expects to see this year.
- Increased spending on equipment and software. Good overall economic data and higher business confidence will drive positive growth in equipment and software investment, reversing 2016’s negative investment rate.
- Higher rate of financing. Nearly eight in 10 businesses are financing equipment acquisitions, and lease financing is also on the rise. Market data indicate equipment leasing per se is also moving higher this year.
- Pro-business federal policy. Capital investments should result from tax relief, infrastructure contracts and reduced regulation. Changes to interest deductibility in the tax code is a concern the manufacturing industry is watching.
- Trade conflicts. The Trump administration’s withdrawal from the Trans-Pacific Partnership and the Paris climate accord along with the possible renegotiation of the North American Free Trade Agreement and other bilateral trade agreements could lead to trade retaliation that affects manufacturers’ exports and the cost of imported material inputs.
- Steadying oil prices. Oilfield and mining investments have stopped plunging, and the petroleum industry will become less of a drag on the economy.
- Reversal of underperforming equipment verticals. Construction equipment investment should rise, and energy, rail, materials handling and industrial equipment should benefit from positive changes in market and economic conditions.
- Interest rates. The Federal Reserve is expected to incrementally increase U.S. interest rates, which will have an impact on the cost of equipment financing.
- Technology innovations. Increased flexibility and convenience in equipment financing should increase efficiencies, aid transaction and finance management, and reduce paperwork.
- Lease accounting changes. New accounting rules by the Financial Accounting Standards Board last year that brought leases onto the balance sheet didn’t cause the problems they were anticipated to. Leasing remains a financially beneficial method of acquiring equipment.
- Wild card developments. Geopolitical shifts, terrorism and surprising congressional action (or non-action) on taxes, budgets and infrastructure could change the landscape in unexpected ways. The manufacturing industry needs to keep a wary eye open.
Remember that new equipment lease contracts typically mean you need to increase your replacement cost limits on your Business Personal Property insurance. This is especially true if you have a coinsurance clause in your insurance policy. You should also make sure you have adequate Equipment Breakdown coverage so talk to an insurance professional about adding appropriate protection as needed.
About Precision Manufacturing Insurance Services
Precision Manufacturing Insurance Services (PMIS) specializes in insuring manufacturers throughout California and can provide you with both the property insurance coverage and the Equipment Breakdown coverage you require to help manage your risk. We can also review your entire insurance portfolio and advise you on other areas of business protection. Give us a call at 855.910.5788.