President-elect Barrack Obama’s promise to start the biggest U.S. public works program in half a century produced a widespread rally in global markets on Monday. It was led by industrial gaints like U.S. Steel Corp. (X) and construction equipment maker Caterpillar Inc. (CAT), who helped build roads, bridges and tunnels under President Eisenhower in the 1950s. while engineering firm Siemens AG (SI), General Electric Co. (GE) and the U.S. automakers were also among the winners.
When the Congressional Budget Office recently outlined how various fiscal tools could stimulate the economy in the near term, infrastructure spending did not make the list due to the long start-up lag related to project planning. Nonetheless, it seems pretty clear that infrastructure spending will increase in the coming months and possibly years, according to Myles Zyblock, chief institutional strategist at RBC Capital Markets.
He put together a list of 20 names that could benefit from public spending on bridges, roads and the equipment and systems required to improve energy efficiency. EMCOR Group Inc. (EME), which makes systems for voice and data, electrical power and lighting, topped the list. It was joined by engineering and construction company Fluor Corp. (FLR) and facilities maintenance product supplier W.W. Grainger Inc. (GWW).
Nuts-and-bolts distributor Fastenal Co. (FAST) and specialty contractor Quanta Services Inc. (PWR) came next in RBC’s ranking, which shows that these top names have the best odds of outperformance over time. Caterpillar, Jacobs Engineering Group Inc. (JEC), Terex Corp. (TEX), Vulcan Materials Co. (VMC), Evergreen Solar Inc. (ESLR) and Fuelcell Energy Inc. (FCEL) also made the top 20.
Mr. Zyblock also looked at the characteristics of various policies as short-term economic stimulus, including individual tax proposals, business tax plans and spending proposals. For individuals, a lump sum rebate is typically going to be more effective if it is focused on people who are likely to be spending it, the strategist said in a research note. “Experience is mixed with respect to effectiveness, introducing some uncertainty about the rebate’s effect,” he said, adding that processing and mailing rebate checks also takes time.
Temporary tax reductions such as a withholding holiday for the Employee Payroll Tax could be viewed the same as a rebate, which might reduce the stimulus, Mr. Zyblock said. Meanwhile, an across-the-board tax rate cut gives most of the breaks to higher-income groups, who are probably less likely to spend it. RBC also considered a reduction in corporate taxes, suggesting that while they have a limited impact on new investment decisions, improved cash flow could help smaller firms in particular.
Spending proposals such as direct transfer payments to households through extending or expanding unemployment benefits – something that is frequently done in recessions – was praised for being cost-effective, fast-acting and with a relative reliable outcome. So too was the temporary increase of food stamp benefits. Meanwhile, investing in public works projects is not considered very cost-effective, may take a long time to have a positive impact, but the positive outcome is predictable.
