Stimulus Effect
May 1, 2009

Don Harris

Infrastructure Companies Are Big Winners Under Plan To Jumpstart Economy

Construction companies, big and small, figure to be the primary beneficiaries of some $4.2 billion in federal stimulus money that will flow into Arizona in the months ahead. But economists and industry officials say businesses across the board will share in what could be a spending bonanza.

Clearly not everyone is in construction. Yet, as major projects move from drawing boards to construction sites, laborers and management teams are in a better position to perhaps buy a car or get an old one repaired, purchase a needed washer or dryer, go out to dinner, or shop for clothes for their kids. That’s what many see happening as the money flows downstream.

Industry experts say estimates of the multiplier effect range from 3.5 to 5.5, meaning that for every dollar spent on construction, the impact on the rest of the economy is $3.50 to $5.50. Others say that every $1 billion spent on construction results in 35,000 to 40,000 jobs.

Other businesses in line to benefit include those related to health care, energy efficiency and home improvement. And it will help if a business is savvy about coping with government bureaucracy.

There are debates about whether the Obama administration’s $787 billion stimulus package involves too much government or not enough government, but everyone seems to agree that government has to do something to pull the nation out of the worse economic downfall in decades.

Economics Professor Dennis Hoffman, director of the L. William Seidman Research Institute at Arizona State University’s W. P. Carey School of Business, is among those who expect stimulus money targeted for indigent health care to have a ripple effect, impacting hospitals and health professionals. But, says Hoffman, who has done projects for Del Webb Construction, the Arizona Department of Transportation, the Arizona Department of Environmental Quality and APS, there is more.

“Any private sector business that supports K-12 and to some degree higher education, will benefit,” Hoffman says.

He includes suppliers, and maintenance and construction firms that serve the education field. Above all, construction companies involved in infrastructure and road building will receive what Hoffman calls “a needed shot in the arm.”

“The general contractors have been begging for this,” Hoffman says. “They were absolutely on the front lines working for this injection, because their businesses were dead in the water.”

Of the $4.2 billion in stimulus money, $522 million is allocated for transportation.

David Martin, executive director of the Associated General Contractors, Arizona Chapter, echoes Hoffman’s assessment. “All highway and heavy construction firms will be beneficiaries,” Martin says.

Additionally, contractors who work on education facilities, particularly in lower-income areas, and those that build water-treatment facilities, emergency shelters, and public infrastructure projects, such as streets and sidewalks, should benefit. Martin calls it “neighborhood stabilization.”

David Jones, president and CEO of the Arizona Contractors Association, says companies with experience in public works projects will benefit, especially those that “historically understand red tape and the bureaucratic levels of federal contracting.”

Utility companies should be able to take on energy-related projects, and work should be available for companies that retrofit residential, schools and government buildings to solar energy, Jones says. Women, minority and disadvantaged business enterprises, plus businesses run by war veterans “will have a place at the table,” he adds.

Homebuilders could benefit from projects on military bases, such as single-family units or replacing aging barracks.

Doug Pruitt, president and CEO of Sundt Corp., says contractors such as Sundt are positioned to do well in the stimulus world because of the company’s broad market diversification.

“We do highway work, industrial, water and sewage treatment, university work, K-12 — a whole host of building work,” Pruitt says.

He doesn’t expect much school construction, however, because nationally only 8.3 percent of the $143 billion allocated for construction is set aside for schools. Most of the money will go for highways, bridges and water-related projects, with funds funneled through such federal agencies as the General Services Administration and the Army Corps of Engineers.

Pruitt says Sundt is focusing on its federal divisions and moving personnel from other units that have suffered because of the economy.

At Sunstate Equipment in Phoenix, which rents a full line of hand tools to heavy equipment, CEO Benno Jurgemeyer says it all comes down to “job creation and getting consumers back in a spending mode.” He says his company would benefit directly from highway or vertical construction, and indirectly if the stimulus package keeps office buildings and retail centers rented and full of employees and customers, thus accelerating the development process.

Jeff Whiteman, president and CEO of Empire Southwest, an authorized Caterpillar dealer for heavy equipment including off-highway tractors and trucks, says his firm should see some benefits, but adds: “I think it falls far short of being a true stimulus package and truly creating jobs. What we have is better than nothing. It will help us as construction picks up and hopefully some highways are built.”

Typically, businesses such as Empire Southwest are the first in and the first out of a recession. When housing construction stops, site preparation and development stops, and when housing is ready to resume, site preparation resumes. But in today’s economy, so many improved lots are ready for building that Whiteman says his industry’s recovery will be tied to heavy and highway construction.

Whiteman doubts that tax breaks for individuals will be a factor in improving the economy. People who get a little more money in their paychecks will save it rather than spend it, because they’re afraid they’re going to lose their job.

“It’s all about jobs,” Whiteman says. “Housing is there. It’s affordable. Interest rates are low. The way to get this economy moving is to create jobs. This stimulus plan is more like a $90 billion stimulus and $700 billion social services plan.”

Whiteman is not alone in his view of the stimulus plan. ASU Economics Professor Stephen Happel says tax cuts for individuals won’t matter much.

“They’ll buy food and save a little, but they won’t buy a new color TV,” Happel says. “I can’t imagine it having a big impact on fancy restaurants. Maybe some fast-food chains will get some business, and the mass retailers should benefit. A big part of the stimulus package is energy, so maybe people will buy more energy-efficient stuff, like weatherizing their homes. Stores like Home Depot might benefit a little.”

Asked about the benefit of money channeled directly to state government, Happel says, “It depends on how that money is allocated and how much gets sucked up in the bureaucracy. Some people who would have lost their jobs will be saved, so that might have some impact. ”

Happel’s colleague, Hoffman, says beneficiaries will include any business that supplies state government, and businesses that depend on the consumption patterns of state and local government employees. Hoffman and Happel are among the public employees who were forced to take unpaid furloughs as ASU deals with legislative cuts in funding.

To address the sick economy, Happel favors “big time tax cuts,” saying the stimulus package is more like a redistribution of wealth, taking from Peter to pay Paul, and warns of “big-time inflation down the road.”

When American corporations make profits overseas and bring that money back into the country, they are taxed at 35 percent, Happel says.

“It won’t cost the government anything because the companies don’t bring that money back if it’s taxed at 35 percent,” he says. “It sits overseas. Eliminate that tax for one year and it amounts to about $580 billion. That’s not too far short of the stimulus,” he says. “Then the companies can reinvest that money for jobs. It’s a slam dunk.”

Hoffman defends the stimulus plan and its multiplier effects downstream, saying they benefit “everybody from a barber shop to a grocery store.”

“We’ve got an unprecedented, in my experience, collapse in consumer, business and investor confidence,” he adds. “Let’s get behind the package and give it a chance to work. There will be plenty of time to do the political dance in a year or two.”

Regarding housing, Hoffman says many economists believe the industry has farther to fall.

“It’s all about this confidence issue,” he says. “We’ve got to find traction when it comes to confidence, and just muddle along for awhile. These massive foreclosures are taking everything down.”

Hoffman is confident that eventually the stimulus money is going to find its way to everybody.

“I’m for infrastructure,” he says. “I’d like to see some longer-lived projects, like building a hospital, repairing and building roads, helping schools, and putting together programs that will have more lasting effects. Some say the burden is all on our children, but if we do it right, spend this money wisely, it’s going to accrue benefits to our children as well.”

But Hoffman is pragmatic about the tough road ahead.

“By all accounts, the next two years are going to be pretty bad, and ’09 will be terrible,” he says. “I’ve got my concerns about the first part of 2010. People need to take some confidence in the fact that government is not standing by and letting this economy go into a complete tailspin.”

Happel, despite his opposition to the stimulus package, is optimistic.

“There is a natural recovery process. We’re going to come out of this. By mid-summer housing will bottom out in many parts of country,” he says. “It’s hard to imagine that the stimulus package will have any kind of a big impact this year. It may happen when infrastructure construction spending kicks in next year that we will see more of a pop.

“The only way the stimulus package will have an immediate positive impact is if the American public, en masse, believes that it’s going to end the recession. Eliminate some of the fear and people start spending. There is a tremendous amount of fear out there. People are scared to death, and with good reason. Staff at ASU, they’re not only facing furloughs, but they’re thinking at the end of this fiscal year they’re going to lose their jobs. They’re running scared.”

Jones of the Arizona Contractors Association is concerned about bureaucratic delays. Any contractor who has dealt with the federal government on public works projects knows about the steps that need to be taken.

“It could be three to four months before a shovel-ready project is ready to go,” Jones says, “and maybe another 60-to-90 days before you get the first payment.”

Contractors are hoping that Congress approves an advance payment of 40 percent of a project’s amount to the contractor on the date the contract is signed. Such a payment would be covered by a performance bond, Jones says, so taxpayers would have nothing to lose if a company defaults.

“We have to look outside the box,” he says. “If we want maximum effect for the stimulus package, it is best that the money is put on the street into the hands of the people who are out there working and are going to spend.

“Construction is the second largest contributor to the revenue stream in Arizona, second only to retail. So, how the Arizona construction industry goes, so goes Arizona’s economy.”