The longest U.S. growth streak holds mixed messages for ELFA members
there was a Teflon economy, the current cycle has certainly exemplified it until now. In July 2019, the National Bureau of Economic Research reported that the latest economic expansion, which began in June 2009, is the longest in U.S. history, breaking the previous 120-month record, which ran from March 1991 to March 2001. The prevailing attitude among ELFA members is still optimism—but coupled with a wary eye toward the horizon and the mixed indicators that keep appearing.
“There’s still demand out there,” says Kirk Phillips, Chair of the Financial Institutions Business Council Steering Committee and President & CEO of Wintrust Commercial Finance in Frisco, Texas. “And there are some clouds on the horizon that are giving people pause.”
“How U.S. trade policy shakes out with our trading partners, predominantly China, is having a huge impact on our clients and what businesses are doing.”
Kirk Phillips, Chair, Financial Institutions BCSC
Those mixed feelings were reflected in the association’s quarterly Beige Book, which compiles survey data from four of ELFA’s Business Council Steering Committees (BCSCs)—captive and vendor finance firms, financial institutions, independent middle market companies and small ticket firms. Growth was a consistent theme in each sector, but a variety of macroeconomic and domestic concerns have members actively monitoring their business levels, delinquencies and the financial news to try to keep ahead of an economic cycle that isn’t acting in typical fashion.
Each of the four BCSC Chairs reviewed the latest Beige Book data from the second quarter of 2019. They shared feedback from their sectors, as well as their own insights, about current business conditions and market factors that are affecting ELFA members.
Low-Cost Money and Steady Demand Keep Growth Going
While the majority of respondents in each sector saw spreads tighten or stay the same, there were pockets that reported seeing spreads widen, including 36% of Captive & Vendor Finance BCSC members and 29% of Financial Institution BCSC members. While that seems like a bright spot, it’s likely because of the affordable cost of money right now, says Brian Eschmann, Chair of the Independent Middle Market BCSC and President of Trans
Lease, Inc. in Denver, Colorado.
“The recent drop in interest rates may have contributed to the ability of some lenders to widen spreads as their cost of funds have dropped more quickly than the marketplace’s expectation for lower rates.”
Brian Eschmann, Chair, Independent Middle Market BCSC
“The recent drop in interest rates may have contributed to the ability of some lenders to widen spreads as their cost of funds have dropped more quickly than the marketplace’s expectation for lower rates,” he says. If this is correct, improvements in spreads may be temporary.
But robust competition and steady demand is still keeping most members’ spreads compressed. Just 13% of Small Ticket BCSC members and 23% of Independent Middle Market BCSC members saw increased spreads.
Trade Conflicts and Other Issues Take a Toll
While the declining cost of funds has benefitted some members, issues on the global stage loom large. “Our trade issues with China and Mexico present a unique economic concern. This is causing a level of uncertainty with our partners as it is not within their scope of control,” says Shannon Stangl, Small Ticket BCSC Chair and Country Sales Manager at Wayne, Pennsylvania-based DLL. As financial solutions providers, ELFA members must be ready to adapt and help the companies and customers they serve find solutions when tariffs affect their businesses.
“New lease accounting standards will bring significant change.”
Shannon Stangl, Chair, Small Ticket BCSC
Trade issues are also a concern for members in the financial institutions sector. “How U.S. trade policy shakes out with our trading partners, predominantly China, is having a huge impact on our clients and what businesses are doing,” Phillips says. “If that’s not resolved thoughtfully and soon, then that could be one of those things that certainly tips our economy into a negative trend.”
Eschmann points to laments from trucking companies that have voiced concerns about softness and dropping rates. “With order boards out so far on Class 8 trucks, it doesn’t take a lot for those things to reverse in a hurry. The large fleets start canceling orders and it ripples down. Anything that would reduce overall consumer demand would likely have a profound effect on most transportation-related segments,” he says.
And while most sectors don’t seem concerned about changes to accounting standards and their impact on customers, Stangl cautions that members must be prepared. “New lease accounting standards will bring significant change. It is our responsibility to understand how it will affect our partners so we can work to find mutually beneficial solutions,” she says.
Don’t miss the latest data:
Delinquencies Are Getting Attention
In the period after the economic downturn, credit standards were buttoned-up and portfolio quality reached record highs. In more recent quarters, delinquencies and charge-offs have ticked up. While they’re still near historic lows, members are watching them closely, looking for signs of risk before they become problematic.
“The overall credit environment remains relatively stable,” says Troy Graziani, Chair of the Captive and Vendor Finance BCSC and Director of Corporate Operations and Business Intelligence at Toyota Industries Commercial Finance, Inc. in Dallas, Texas. “We continue to monitor high-risk areas with continuing threats of market contraction on the horizon.”
Stangl agrees that it’s not yet time for concern. “We are seeing increases in charge-offs, while delinquencies continue to be relatively flat,” she says.
Hot Opportunities? Depends on Whom You Ask
If there’s one constant among ELFA members, it’s that their “hot markets” are very diverse. In some sectors, industries made both “best-performing” and “worst-performing” lists (e.g., mining and oil/gas extraction and truck transportation among Independent Middle Market BCSC members). However, construction and industrial/manufacturing made “best performing” lists in all sectors.
“Currently we see the oil/gas extraction segment performing, but we are particularly conservative in our underwriting and types of equipment we finance in this space,” Eschmann says. “I would also say that lenders may rate the segment as underperforming due to its overall volatility and previous losses incurred in this space.”
“The overall credit environment remains relatively stable. We continue to monitor high-risk areas with continuing threats of market contraction on the horizon.”
Troy Graziani, Chair, Captive and Vendor Finance BCSC
Part of the challenge in measuring top performers is that members are often specialized and apply different strategies. For example, Stangl’s DLL focuses on medical equipment and technology as key markets, she says. Graziani says his company has sustained strong new business volume through strategic alliances. “While the overall market starts to plateau, we’ve been able to increase share through strong collaboration with our OEM partners and several unique program and promotional offerings,” he says.
Another common theme among members was looking toward the future, especially using and doing business in the technology space. In fact, the technology sector represents a “massive opportunity” as traditional computer use declines and mobile devices increase.
“Phones and tablets are a keystone in how businesses function. With so much being available through mobile applications, with no sign of slowing down, we see that not only as an opportunity but the future of our business,” says Stangl. “In addition to tech, there is opportunity in usage-based financing across various sectors, from agriculture to construction to medical equipment. Many organizations are wrestling with how new equipment advances and digitization can and should be integrated.”
Graziani agrees. “Technology continues to play an ever-expanding role in the equipment finance space, from e-contracts to artificial intelligence to cryptocurrencies. Having clarity on customer expectations and properly forecasting future needs is paramount to ensure resources are focused in the highest value add areas,” he says.
As members look toward the future with a mix of emotions, they continue to make plans and seize opportunities. Headcounts are increasing and feelings are more positive than negative, the Chairs agree. However, many are watching closely for signs of a slowdown and preparing to weather economic storms if they arrive.