Welcome to the 'New Normal': Modest Investment in Capital Equipment

Dec. 27, 2010
Banks and borrowers will continue to move tentatively in 2011 before investing big dollars in new machinery, says NEFA's Peretore.

Manufacturers might be getting ready to invest in new equipment, but several signs point to only modest growth in 2011, as questions of financing and confidence moving forward set the stage for a tentative recovery in capital investment.

Just as the market is ripe for first-time home buyers, an overabundance of supply and a dearth of demand have created ripe opportunities for companies to invest in new industrial machinery. But according to Frank Peretore, an attorney who focuses on equipment leasing, and who sits on the board of directors for the National Equipment Finance Association, companies might be stabilizing and the banking industry is returning to health, but that still doesnt mean large-scale investments are taking place.

"What I'm seeing is companies are showing a little more interest in buying new equipment and doing deals, but very tentatively," says Peretore. "On the other end of the spectrum, companies that are showing interest are still having a lot of trouble getting deals funded. Deals that could have easily been funded years ago are very difficult to secure now."

The climb out of the doldrums has been slow. Repossessions and liquidations of machine tools have dropped precipitously compared to the numbers seen a year ago, according to the NasTrac Quarterly Index (NQI), which tracks equipment trends.

"What you're seeing is this sense of a new normal," says Peretore. "No one's confident or cocky anymore. Most of the people I've spoken with share the feeling that for the next year or two things might not get much worse, but it also isnt likely going to get much better."

Part of this reflects the global economy. The landscape for financing of new equipment has changed dramatically in recent years, forcing buyers to seek loans from a banking sector that has consolidated significantly and is far more cautious in its lending habits.

"Lenders are just now coming to the realization that they can't really stay still anymore, treading water," says Peretore. They have to make loans in order to increase profits and be successful. However, they're still nervous to do it and only want to do it with quality deals. And what youre seeing is quality deals are defined differently today than they were two years ago."

According to a December survey conducted by the Equipment Leasing & Finance Foundation, 42.5% of respondents believe leases and loans to fund capital expenditures will increase over the next four months, while only 40% anticipate economic conditions will get better over the next six months.

Still, for all the questions about confidence and financing, the industrial capital equipment investment is expected to grow, not decline, in 2011.

"If you look at the other sectors, you have construction equipment, which is dead weight right now," says Peretore. "And there's significant growth for the high-tech sector. Industrial equipment is right in between. It's slower, but growing. Considering where it was 18 months ago, that's an improvement."

See Also- Other 2011 Predictions

IR's Mike Lamach: Building on a Strong Hand

Lean Won't Work in 2011

Manufacturing Death Greatly Exaggerated

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