STATE INDUSTRY OF THE 2015 high corporate profits have encouraged businesses to fi-nance their investments. In 2015, two factors will likely lead to continued increases in the propensity to finance: (1) a steady economic recovery and (2) major shifts in Fed policy. First, as the economy gains strength and the scars of the financial crisis fade, business confidence should improve. Second, the Fed has now official-ly ended its bond-buying program and is expected to raise short-term interest rates sometime in mid-2015. Given the expected rise in interest rates, businesses may pull forward planned investments in order to lock in lower rates. 12 Keep risks (and upside potential) in mind. 10 A Republican Senate presents potential opportunities for equipment finance. In 2015, a Republican-led Congress could potentially benefit the equipment finance industry. First, Republicans may ease restrictions on liquefied natural gas (LNG) exports, which could encourage greater investment in natural gas produc-tion and LNG facilities. This, in turn, could boost investment in construction, transportation and mining equipment. Second, Republicans may attempt to weaken require-ments under the Dodd-Frank Act. While President Obama is likely to veto any major amendments to the law, Republicans may attempt to make changes to this legislation via smaller, piecemeal reforms. In fact, we saw the beginning of this trend in December’s $1.1 trillion spending bill, which rolled back a controversial Dodd-Frank swap-trading rule. Finally, a Republican Senate could open the door to cor-porate tax reform, as the GOP strives to prove it can govern ahead of the 2016 presidential election and President Obama attempts to build his legacy and address a long-standing issue in the U.S. tax code. While a successful corporate tax reform effort is somewhat optimistic in light of recent gridlock, it remains a possibility given that the core elements of both parties agree that the current U.S. corporate tax policy hurts the global competitiveness of U.S. businesses. 11 Portfolio performance may weaken in 2015. After declining for several years, delinquencies and charge-offs may have finally bottomed out. The industry saw record portfolio performance in 2012 and 2013, as delinquencies and charge-offs fell to all-time lows. Portfolio performance remained strong in 2014, with charge-offs hovering around multi-year lows throughout the year. However, continued improvement in the economy will inevitably lead to lenders loosening standards and borrowers demanding more credit. Rising confidence and the fading scars of the financial crisis will likely encourage increased borrowing, as well. In light of these pressures, delinquencies and charge-offs may increase in 2015, particularly if the pace of economic growth accelerates. While 2015 is shaping up to be a year of moderate growth for both the U.S. economy and the equipment finance industry, several factors could change the course of the year. For example: ● ● The faltering global economy and heightened geopolitical tensions in Russia and the Middle East are among the great-est threats to a “breakout” year for the U.S. GDP. Much of the Eurozone is teetering toward recession, China is slowing and emerging markets face significant structural challenges. Meanwhile, threats ranging from ISIS to Ebola to Russian aggression could disrupt financial markets and trade flows. ● ● The new Republican majority in the U.S. Senate will undoubt-edly affect policy debates, but its effect on Congress’s ability to legislate effectively is far from certain. It is possible that a Republican majority will trigger a shift toward cooperation in advance of the 2016 election, as both parties attempt to con-vince the electorate of their ability to govern. Conversely, con-tinued or even worsening gridlock between Republicans and President Obama is also possible. Controversial issues such as health care, immigration and environmental regulation may “poison the well” for other issues on which bipartisan com-promise might otherwise be possible (e.g., permitting reform, corporate tax reform and promotion of energy efficiency). Along with major risks threatening to cloud the 2015 out-look, other factors could provide an upside boost to GDP growth and the equipment finance industry. For example: ● ● If capacity utilization remains above 80% and capital ex-penditures ramp up in response, it could add up to a full percentage point to 2015 growth. ● ● If oil prices remain below $70 for the bulk of 2015, the re-sultant increase in consumer purchasing power could boost GDP by an additional 0.5–0.7 percentage point. Further-more, low oil prices will also help other advanced econo-mies, particularly Western Europe, China and Japan—thus reducing the global economy as a risk for U.S. growth. ● ● If the housing sector—which has largely been a missing piece from the economic recovery—surges in 2015, it would pro-mote positive ripple effects throughout the economy and spur new construction investment. Many potential homeowners have stayed on the sidelines in the wake of the recession, but steady increases in home prices and the prospect of rising in-terest rates could encourage first-time homebuyers to invest. Accounting for these major trends, we expect another solid year for equipment finance in 2015. As the U.S. economy gains momentum and looks to finally reach and even surpass 3% growth, it will provide a foundation for continued expansion in the equipment finance sector. Additionally, the equipment finance industry will continue to find new ways to add value to their products and seek new markets in which to grow. ■ Jeff Jensen is a Director at Keybridge Research. 24 JANUARY/FEBRUARY 2015 EQUIPMENT LEASING & FINANCE MAGAZINE