There has been a lot of hype about the Obama stimulus package scheduled to complete its course through Congress in mid February. There is no doubt the economic plan will provide some sort of relief to a contracting domestic economy, but given the multiples of some of the popular construction materials companies, you would think this would not only address our economic problems, but also launch the economy back into full swing. I am skeptical how much this stimulus plan will actually affect the economy, America’s global competitiveness, and more relevant in this sense the bottom lines of construction materials companies within the Materials sector. When looking at what Obama has announced as his priorities, I believe many investors will be sorely disappointed at the lack of stimulus this package really provides.
The price tag for the economic stimulus package is exceeding $800B. Much of this will go to social security, food stamps, and health care spending. In reference to infrastructure spending, approximately $90B will be spent on specific projects while various accounting principles are temporarily adjusted to the benefit of companies. To break down infrastructure even further: $30B is slated for transportation spending, $31B allocated for the construction and repair of federal buildings, $19B in water projects, and $10B in rail and mass transit projects.
The adjustments of accounting principles are as follows: companies will now be able to claim tax credits from the past five years instead of the past two effectively decreasing the income tax expense that companies will realize on a yearly basis. Bonus depreciation will be used for certain assets of specific construction companies. Lastly, construction companies will be able to double the write offs for their capital investments.
As for the rest of the American Recovery and Reinvestment Act, $275B will be spent on tax cuts ranging from $500 to possibly $8,000. Education investments total $141.6B focusing on local school districts, and the modernization and repair of higher education. Welfare and unemployment spending consists of a walloping $102B of which $20B is food stamps. Finally, the energy portion, a total of $58B, focuses on stemming growth in the renewable energy segment through $20B of tax cuts and $32B for funding an electric smart grid. I want to mention that I don’t believe this package is all bad, I’m in favor of the education and energy spending, but I don’t believe this will have the speculated results on the bottom lines of Materials stocks that are currently being priced in by the market.
President Obama has mentioned numerous times that he is focused on combating unemployment, and keeping families in their homes. “Spending is the whole point of a stimulus” and by providing Americans with work on America’s infrastructure we can begin the arduous climb back to economic expansion. However, the projects highlighted will prove to be little more than window dressing for the economy.
