The myth of the coming infrastructure boom
It seems as though one can't pick up an investment magazines, click on a business website, or watch CNBC or Bloomberg right now without coming across some sort of story about how the new government stimulus package aka the “American Recovery and Reinvestment Bill of 2009″ is will be a tremendous boon to infrastructure companies. While I certainly think that the companies in this sector will do better with the passage of the proposed stimulus package, I think that many people are overestimating the impact that it will have on them.
Take a look at the above chart. A very small percentage of the total $825 billion package will actually go directly to infrastructure projects. Some of the largest chunks of the package have absolutely nothing to do with infrastructure, such as:
- $275 million in tax cuts - this is the part that I personally like the best
- $87 billion is for a temporary increase in the Medicade matching rate - this is nothing more than printing money to prop up a slowly dying program.
- $79 billion in state fiscal relief - one might be able to argue that some of this might be spent on infrastructure, but given the dire shape that most states are in I suspect that this will at best let them tread water...not start massive new projects.
- $43 billion for increased unemployment benefits - no building here
- $41 billion for local school districts - I actually like the fact that money is going to schools, not just because I am a father with two young sons, but also because better education helps the country build for the future. I have to wonder how much of this money will be used to actually build anything. I suspect that the bulk of it will go to pay teachers and pay for supplies.
- $39 billion in healthcare for newly unemployed workers - no building here
- $20 billion for food stamps - no building here either
- Of course let's not forget the missing $31 or so billion that seems to be unaccounted for
So what is being spent on infrastructure then? Let's see, there's:
- $32 billion to "transform the nation's energy transmission, distribution, and production systems"
- $31 billion to modernize federal and other infrastructure
- $30 billion for highway construction
- $19 billion for clean water, flood control, and other restoration investments
- and a bunch of other smaller pieces of the pie.
All told, I estimate that only around $144 billion of the total $825 billion package will be spent on actual infrastructure projects. That represents just 17% of the total pie. After one factors in the fact that these projects are spread out over a number of different sectors (roads, energy, water, etc...) and adds in the fact that corruption and waste at the government level (which is a large, inefficient beast) will sap a chunk of the spending what is left for individual companies? Will it be enough to offset the loss in private spending that was fueled by a massive leverage boom over the past two decades? I personally have my doubts.
I guess that the point of this post is that while the theory that the stimulus package will be a massive boon for infrastructure companies sounds good at first, it isn't nearly as promising when one takes a closer look at it. The government spending will certainly help some, but many of these companies have already rallied quite a bit since the announcement of this plan. I personally would not be a buyer of infrastructure companies at this point.
Note, I am long small positions in both Chicago Bridge and Iron (CBI) and Flour (FLR), but both were purchased a long time ago.