State of the Industry 2022

After muddling through its worst year in the post-WWII era, the U.S. economy bounced back in a big way in 2021. As vaccines became widely available and robust federal support continued to flow to businesses and consumers, the economy expanded at a roughly 6.5% annualized rate during the first half of the year—more than double the pace typically associated with a strong economy. 

Equipment finance played a significant role in this growth: equipment and software investment expanded by more than 15% (annualized) from January – June, according to the Equipment Leasing & Finance Foundation’s Economic Outlook. This was comparable to the rapid growth experienced after the 2008–09 recession and, based on historical precedent, more than half of this investment was likely financed. 

Although growth slowed during the second half of the year due to a variety of factors (e.g., a COVID-19 resurgence and supply chain issues constraining economic activity, federal support measures ending, and high inflation curbing consumer confidence), 2021 will likely end up as one of the strongest years of growth in the modern economic era and the fastest post-recession recovery on record. 

Here are six predictions and expected trends that we believe will shape the economy and industry in 2022.

1. The economy will experience solid growth in 2022. 

After a highly volatile year in 2021 during which growth forecasts were readjusted on a near- weekly basis, the economy is on more even footing this year. Consumers and businesses alike are increasingly adapting to the “new normal” of COVID-era life, and risks stemming from the pandemic are more limited than last year given the widespread availability and effectiveness of vaccines that reduce the likelihood of infection and severe disease. Indeed, as of Dec. 30, more than 73% of U.S. adults are fully vaccinated, including 88% among those over 65. While the emergence of the Omicron variant is evidence that the pandemic is not yet over, Americans have shown that they can adapt, and the economy’s increased resiliency to new strains should be positive for equipment and software investment demand. Consumers’ willingness to resume normal mobility and consumption patterns in the face of Omicron and potentially other new variants — and in absence of robust federal support that supercharged the economy for much of last year — will be a key factor to watch in determining economic growth this year.


Though there remain substantial risks, including inflation and significant lingering supply chain issues (especially in the automobile sector), the combination of a much-improved public health outlook, strong hiring demand, rising wages and a substantial amount of accumulated consumer savings still waiting to be spent should produce real GDP growth in the 3–4% range this year. 

 

2. While interest rates are likely to rise, industry conditions should remain strong.

Equipment and software investment was among the first components of the economy to recover after the 2020 recession. Investment boomed as businesses adapted to new operating procedures and changing consumer preferences. This rising investment tide benefited firms of all sizes, with cumulative new business volume up 10% year-to-date as of November. We expect lending conditions to continue to normalize further in 2022, and new business volume momentum may shift toward banks as we suspect it did in 2021 (note that independents were the clear winner in 2020 according to ELFA’s 2021 Survey of Equipment Finance Activity). However, strong demand for equipment and software—especially given the tight labor market that encourages some firms to invest in capital—should bolster financing activity in 2022.

Though the equipment finance industry should expand at a healthy rate next year, growth is likely to be uneven across equipment verticals. Verticals such as automobiles, construction machinery and agriculture may continue to face pandemic-related headwinds such as input shortages, high energy prices and volatile demand conditions. Other verticals, including trucks, oil & gas equipment and materials handling equipment, may benefit from sustained demand in 2022, especially if pandemic conditions linger due to Omicron or other new variants. All told, the industry is well positioned for another strong year, even if there are some bumps along the way.

3. Higher inflation is here to stay. 

A year ago, we viewed rising inflation as a potential X-factor worth monitoring, though at the time it was mostly contained to a smaller subset of goods like semiconductors and used cars that were particularly exposed to pandemic-related factors. However, within months CPI inflation had accelerated to a multidecade high. Initially, conventional wisdom was that inflationary pressures would be transitory, but annual CPI growth rose progressively higher, peaking at 7.0% in December as supply chains remained snarled and hiring difficulties put upward pressure on labor costs. 

Looking ahead, we expect many supply chain issues to be largely resolved over the next 12 months (though some industries, particularly automobile manufacturing, may remain tangled until 2023), and while inflation is likely to remain high by historical standards, we expect it to recede below 6% Y/Y by the end of Q2. At the same time, we do not expect a return to the “steady as she goes” sub-2.5% core inflation rates the economy has enjoyed since 2007; instead, a core rate in the 3-5% range is more likely. 

Inflation expectations for both consumers and financial markets are becoming unanchored, and mounting wage pressures will continue to drive costs for business owners. Indeed, labor costs are a key area of concern for businesses large and small: roughly half of corporate CEOs reported labor costs as their top cost pressure in the Business Roundtable’s latest CEO Economic Outlook Survey, while the share of small business owners raising compensation is at a 48-year high according to NFIB. 


This level of inflation could impact lease and loan terms via lower real payments but could also boost the residual value of equipment. Further, if the Fed quickly winds down its loan-buying program and increases interest rates multiple times in 2022 as we expect they will, lease negotiations could become increasingly complex. For more information on how to navigate these new conditions, see the Equipment Leasing and Finance Foundation’s 2017 report titled On the Rise: How Inflationary Pressures and Rising Interest Rates Could Impact the Equipment Finance Industry.

4. President Biden’s “Build Back Better” initiative will eventually pass in some form, providing a modest economic boost.

In November, Congress passed and the President signed the Infrastructure Investment and Jobs Act into law.  If no additional infrastructure legislation is enacted this Congress, this law provides for significant new investment and corresponding economic impetus over the next decade.  Additionally, while there are policy hurdles to be jumped and political curves in the road to be navigated still, we anticipate that Congressional Democrats will ultimately pass a slimmer version of the President’s Build Back Better plan sometime in 2022, which would likely include significant funding for climate change mitigation efforts and health care. Along with the new infrastructure spending package, the new investment should boost several equipment verticals in the latter half of the year and 2023. 

5. Onshoring and reindustrialization will be key themes as the world emerges from the pandemic.

Supply chains, the sometimes overlooked and rarely discussed linchpin of the global economy, have been upended during the pandemic. Some of the blame can be placed on the massive shift in spending from services to goods during the pandemic, which has led to component shortages and strained transportation networks. However, another important factor is the nature of modern global supply chains: massive, interconnected, international webs of inputs and outputs that were, up until the pandemic, optimized for just-in-time operations. This system is highly efficient and cost-effective during normal economic times, but as the pandemic has demonstrated, the complexity and interconnectedness has its drawbacks. 

Going forward, we expect that the dual threats of ongoing pandemic-related disruptions and an increasingly antagonistic Chinese Communist Party will combine to accelerate the trend of “reshoring” critical components of supply chains. This trend is expected to be important for both common consumer goods (e.g., apparel) and goods with national security applications (e.g., semiconductors) and, over time, should lead to increased capex in North America. 

6. COVID’s impact on labor markets will force firms to fundamentally change their hiring practices.

While the job market recovery has been remarkably fast compared to prior recessions, the economy is still 3.6 million workers short of its pre-recession level, and there are 3 million fewer people in the labor force as of December. All the major factors that slowed the labor market recovery in 2021 — including accumulated savings, concerns about the virus, family care needs and an accelerating pace of retirements — are likely to persist this year. For many employers, this will mean higher wages and more generous benefit packages. It may also lead to significant changes in how, where and whom they hire. 


Like many industries, the financial sector experienced record-high job openings last year as employers struggled to attract new talent. Equipment finance firms will not be immune to these labor market frictions, and they will need to attract younger workers to offset the faster pace of retirements precipitated by the pandemic and fueled by aging Baby Boomers. Firms will need to consider broadening their recruiting channels and consider potential hires who may not have traditional equipment finance experience, but who have the hard and soft skills necessary to succeed as the industry evolves. Similarly, many firms may find that they have to offer new incentives, such as hybrid or remote work, to attract and retain talent.  The Foundation’s Industry Future Council explored these labor force developments and other inter-related trends in its 2021 report Looking Ahead to the Post-Pandemic Economy: A Strategic Assessment of the Equipment Finance Industry.