Business Equipment and Software Spend to Grow 5.1% in 2013

May 17, 2013
This is more robust growth than that of the overall economy.

The overall economy declined slightly (at a -0.1 percent annual rate) in the fourth quarter of 2012, offsetting an above-average pace of growth in the previous quarter. Spending for inventories, government defense, and net exports all fell—reversing the growth in the third quarter—and offset the positive gains in consumer spending, nonresidential investment, and residential investment. However, this does not portend another recession, according to a report from the Manufacturers Alliance for Productivity and Innovation (MAPI).

On the contrary, according to Daniel Meckstroth, MAPI’s vice president and chief economist, this end-of-year weakness was a correction in production to temporary surges in the third quarter. He believes there are several reasons to be optimistic about continued economic growth in 2013 and 2014. One is that consumer deleveraging is close to an end. Consumers have refinanced, defaulted, or restructured mortgage debt and they have paid down installment debt. The Federal Reserve reports that household debt service as a percent of disposable personal income is the lowest it has been since the early 1980s. This means that households have the capacity to use more credit, if necessary, to finance needed purchases.

Of more concern this year is business investment in equipment. MAPI reports that although firms have record profits and strong balance sheets as well as relatively high utilization of facilities, new orders for business equipment excluding aerospace and defense equipment declined 0.5 percent in 2012. It cites several reasons for the relative sluggishness of business investment:

  • The recessions in the Eurozone and Japan have hurt foreign affiliate earnings and limited U.S. exports;
  • The deceleration of growth in China, Brazil, and other developing economies increased the risks of a global slowdown;
  • There was a high level of uncertainty about federal policy and the resolution of policy deadlines.

MAPI expects business equipment orders to grow at a moderate but below potential rate. The outlook is for inflation-adjusted business investment in equipment and software to increase 5.1 percent in 2013 and 6.3 percent in 2014—substantially faster than the 1.8 percent and 2.8 percent rate of growth, respectively, in the overall economy.

Manufacturing will grow faster than the general economy, but not by much. MAPI forecasts that manufacturing production will increase 2.2 percent in 2013 and 3.6 percent in 2014. High-tech production is forecast to increase 4.3 percent in 2013 and 9.0 percent in 2014. Non-high-tech or traditional manufacturing, which accounts for 90 percent of value added in manufacturing, will grow 1.8 percent in 2013 and 3.8 percent in 2014.

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