CapEx Growth Despite Elevated Rates

As the Federal Reserve continues its efforts to slow the economy and fight inflation, it is not surprising that rates are expected to remain high over the next few months. What may come as a surprise, however, is that despite elevated interest rates, investment in CapEx—and financing investment in CapEx—is on the rise.

According to the latest ELFA Monthly Leasing and Finance Index (MLFI-25), which reports economic activity from 25 companies representing a cross-section of the $1 trillion equipment finance sector, new business volume of commercial equipment financed in May 2024 was up 11% (at $10.2 billion) compared to May 2023—far outpacing GDP growth.¹ 

Increased financing of capital expenditures might be the opposite of what is expected in these economic conditions, at least by historical standards. Typically, a higher cost of capital leads to a cool down of CapEx and subsequent decrease in commercial leasing and financing. So, what makes our current environment different? Here are key observations from the past year and implications for the year ahead:

A few years ago, major supply chain disruptions and their resulting shortages forced businesses to delay or freeze their capital projects. Though supply chain issues are ongoing, they are less severe now. This, combined with the pent-up demand from previous years, led to a significant resurgence in capital spending as the economy reopened—which has steadily continued.

In an uncertain economy, relying on an established banking relationship as a single source of funding is too risky for some businesses. To get ahead of potential changes in their bank’s business, companies are exploring other financing relationships that can complement their main bank.

Although we are facing an interesting and unprecedented intersection of inflation, labor shortages, and supply chain constraints, investment in capital projects has risen and will likely continue to grow in the coming years. By investing in CapEx and using financing as a strategic tool, business leaders can build financial resilience and position themselves to take advantage of growth opportunities on the horizon.