Equipment spending is projected to increase over the next two years as interest rates improve and credit standards loosen.
After major setbacks that began nearly five years ago with the onset of the pandemic, improvements to the supply chain and macroeconomic conditions such as lower rates open the door to wider equipment expenditures, Sarah House, managing director and senior economist at Wells Fargo, said during the firm’s annual economic outlook webinar on Nov. 21.
“We’re also expecting a rebound in terms of equipment spending, given that you don’t have quite the long lead time like you do in structures investment. And so we think that [lower rates are] going to help spur a pickup in equipment spending,” she said. “When we put all the different components of business’ fixed investment together, we do think that we’ll see a pickup over the course of 2025 and into 2026.”
The improved outlook follows underperformance in the equipment sector this year, according to Wells Fargo’s annual economic outlook report.
“While equipment spending has been underwhelming so far in this cycle, the modest reduction in borrowing rates and fewer banks tightening credit standards should lend some support to equipment outlays,” the report stated. “Despite … some pent-up demand for equipment outlays, our modest outlook for capital spending reflects some headwinds.”
Wider conomic expectations
Beyond equipment spending, tariffs will be on the radar for the United States equipment market, Michael Pugliese, executive director and senior economist at Wells Fargo, said during the webinar.
“We would expect [tariffs] to raise prices in the United States over the course of next year or 2026, depending on when exactly those tariffs go into effect,” he said. “Our base case is that they take effect sometime in the third quarter of next year.”
In addition, a potential immigration crackdown under President-elect Donald Trump would pose headwinds for equipment dealers, lenders, manufacturers and operators, House said. The agriculture, construction, domestic service, manufacturing and transportation sectors depend more than other industries on immigrant labor, she said.
With inflation still likely to be higher than the Federal Reserve’s target of 2% over the next two years, additional rate cuts should continue into next year, House said.
“Our expectations for where the Fed funds rate would end this cutting cycle at is in a range of 3.5% to 3.75%, so that would mean that rates are still about 50 basis points higher than our estimate of neutral,” she said. “Economic activity continues to be very resilient in the face of these higher rates, so there’s some indications that the neutral rate might be a little bit higher.”
Meanwhile, equipment lenders expect loan and lease demand for capital expenditures to grow, with 48.3% of equipment financiers projecting an increase over the next four months, according to the Equipment Leasing and Finance Association’s Monthly Confidence Index.
