We’ve all heard the old joke: “Ask ten economists a question and you’ll get eleven answers.” But deep down inside, most of us “non-economists” know that predicting the direction of a global economy is like sitting in the front row of a rollercoaster – it’s simply not for the faint of heart. With a full quarter of 2016 behind us, we asked William Phelan, president and co-founder of PayNet, Inc. to share his insights into the private-business economy – focusing on capital expenditure trends, loan default rates and other economic factors that will ultimately impact the equipment finance industry in 2016. We thank Bill for joining us for the fifth consecutive year and for once again taking a front row seat on the rollercoaster.

Equipment Finance Advisor: The Thomson Reuters/PayNet Small Business Lending Index (SBLI) reversed sharply in February after four consecutive months of retreat. Can you tell our readers if any factors in particular positively impacted the data – such as seasonality?

William Phelan: The data shows us that this reversal is clearly not a seasonal event. It’s not “noise” in the data. We’re seeing a “sea change” in sentiment among private companies where there has been a rapid shift downward in their appetite to invest in equipment. Starting in the summer of 2015, we were seeing significant increases in borrowing by private companies, but by November it was as if the switch was thrown and someone turned out the lights on capex investment – which has continued into a downward trend line. We are seeing core decreases in the amount of investment by private companies and can identify which equipment sectors are slowing most. At this time, the investment rate is roughly 2%, indicating companies are barely replacing worn out equipment. Three of the last five months demonstrated very sharp decreases in investment resulting in the trend line going from a double digit investment rate to single digit.

Equipment Finance Advisor: Your latest report shows a big uptick in February. Do you see this developing into a positive trend line for the balance of 2016?

Phelan: We can all be thankful for the February uptick because if we had seen another decrease, it may have changed our outlook completely for 2016. The February jump was 8% year-over-year which is strong. We are hopefully on our way to improved levels of investment, but the growth rate is still in the single digits on a year-over-year basis compared to last year. Three of the last five months were negative compared to the prior month. One positive month after a terrible 5 months does not a trend make! We are not calling for a change in the business cycle because we are not seeing the financial condition of businesses fall. Businesses seem to be in a cash hoarding mode. They are putting some money to work, probably reacting to some of the aggressive pricing offered by lenders in the market. But, we are breathing a sigh of relief over the rebound in lending activity in February.

Equipment Finance Advisor: Did the Fed’s December interest rate increase and potential fear of more increases have any effect on the pull back in investment?

Phelan: We can’t see into the hearts and minds of the business owners, but the data is telling us they are uncertain about the economy. Fed interest rate policy doesn’t appear to be decisive either so it probably creates more uncertainty. When smaller private companies are uncertain they will likely hunker down and play defense, rather than take new risks. There are many uncertainties weighing on the minds of private business owners at this time.

Noteworthy is that despite the strong financial condition of these companies,  business owners saw something in the economy they did not like and pulled back investment very hard starting in November, 2015 and it seems to be a sentiment change. We are more in a plodding growth environment than a robust growth environment. The plodding will likely continue as long as this uncertainty exists.

Equipment Finance Advisor: Is this pull back in investment across all sectors, or more prevalent in specific sectors?

Phelan: We are watching all the sectors closely on an individual basis. Fourteen of eighteen sectors are still positive, but when we look at the trend lines in these sectors, eleven of the eighteen sectors are on a downward trend – albeit still positive. But a majority of the sectors are pulling back on investment and are not willing to put money to work.  When we see eleven of eighteen slowing down, it’s clear that there are not many sectors that are going to carry this economy (Construction, Educational Services, Retail Trade, Administrative and Support and Waste Management and Remediation Services, Public Administration, Manufacturing, Health Care and Social Assistance, Arts, Entertainment, and Recreation).

The other indicator that tells us this is more of a “pause” or an “on hold” is that the financial health of these companies is extraordinarily strong as I previously mentioned. According to the data, the loans past due remain in the 1.20% range and they have been in that range since January 2013. So, the ability of these companies to repay debt is very strong. These low delinquency rates are due partly to business owners being cautious; but it’s also partially due to the regulations put in place for banks to closely monitor credit quality. 

Equipment Finance Advisor: How would you describe the environment among privately-owned businesses compared to the environment over the prior five years?

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