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Will a bigger U.S. highway bill help tractor makers?
November 10, 2009 / 6:12 PM / 8 years ago

Will a bigger U.S. highway bill help tractor makers?

By James B. Kelleher - Analysis

CHICAGO (Reuters) - The U.S. construction equipment industry has been lobbying hard in recent weeks to convince the Obama administration to support a bill that would nearly double federal spending on transportation infrastructure over the next six years.

No one denies the country’s transportation network is in dire need of massive investment. In its quadrennial report card on the subject earlier this year, the American Society of Civil Engineers gave U.S. infrastructure an overall grade of “D.” It estimated the country needed to spend $2.2 trillion -- almost 10 times what was spent over the last six years -- just to bring things up to “good condition.”

But would the increased outlays envisioned by the legislation really be money in the bank for the sector? Investors should be skeptical.

The bill in question, sponsored by U.S. Rep. James Oberstar (D-Minn.), the chairman of the House Transportation and Infrastructure Committee, proposes increasing spending on roads, bridges and high-speed rail to $500 billion over the next six years, up from about $286 billion over the past six years.

Funding would come either by raising the federal fuel tax, which has been unchanged at 18.4 cents a gallon since 1993, or through some other tax, toll or fee -- which is why the Obama administration has been lukewarm on the proposal.

The White House supports increased spending on the nation’s transport network in principle but has urged patience. It favors extending funding under the old highway bill for another 18 months and taking up Oberstar’s bill sometime in early 2011, after midterm elections are safely past.

The industry’s two big trade groups, the Association of Equipment Manufacturers and the Associated Equipment Distributors, are pressing for quicker passage. They say Oberstar’s bill is needed now to modernize the country’s crumbling infrastructure and combat unemployment, which spiked nationally to 10.2 percent last month -- its highest level since 1983 -- and is double that in the building trades.

“This is one of the best job bills you could get,” said Dennis Slater, the president of the AEM.

“How does this economy really recover unless this huge part of the economy gets back on its feet? The highway bill is a big step in that direction.”


Slater and other industry insiders acknowledge the Oberstar bill will not translate into an immediate jump in equipment orders because of the natural lag time between enactment and spending and the large fleet of idle equipment out there.

So how long would the lag time be? Depends on whom you ask. Slater thinks it might be six months. Ron DeFeo, the chief executive of Terex Corp (TEX.N), recently told Reuters it might be 12 to 18 months.

No one knows for sure because the industry is in unfamiliar territory. Historically, sales have tracked spending, so longtime investors in companies like Caterpillar Inc (CAT.N), Deere & Co (DE.N), Terex and CNH Global NV CNH.N -- the four biggest U.S. makers of excavators graders, dozers and loaders -- are used to seeing increased outlays translate quickly into increased orders.

But this downturn is no ordinary slump. It was preceded by an unprecedented real-estate boom in which construction equipment purchases, like everything else, moved far ahead of real demand. Builders, like everyone else, believed the good times would never end. So they ordered equipment before they really needed it to avoid being placed on waiting lists by manufacturers swamped with orders from their competitors.

The subsequent downturn in both residential and commercial construction created a huge stockpile of unused equipment that will need to be put back to work, and earn its keep, before manufacturers and dealers start to see any big pickup in demand for new product.

As it has pressed its case for increased federal infrastructure spending, the industry has tacitly acknowledged the problem.

In events in Washington, D.C., Chicago and Las Vegas this fall, the Association of Equipment Manufacturers and the Associated Equipment Distributors have paraded tons of big iron idled by the downturn in commercial and residential building.

“We’re not so Pollyannaish or sanguine to think that a new transportation bill is going to instantly soak up all this idle iron,” says Toby Mack, the head of the Associated Equipment Distributors.

“We know that’s not going to happen. But at least it’s going to start things moving in the right direction. So that’s what this is about.”


The closing of the Bay Bridge in San Francisco and the Lake Champlain Bridge between Addison, Vermont, and Crown Point, New York, earlier this year amid concerns about the structural integrity of the spans has added urgency to the debate. Few have forgotten the collapse of the 35W bridge over the Mississippi River in Minneapolis on August 1, 2007, which killed 13 people.

“That was a good example of what happens when you wait too long to fix a bridge,” said Jim Berard, a spokesman for Oberstar.

Making those improvements and repairs now, during the worst recession since the Great Depression, would have the added benefit of helping put hundreds of thousands of unemployed construction workers back to work.

So the industry may not be completely wasting its time lobbying on behalf of the Oberstar bill.

While Slater admits “there is a glut of machinery out there today” that will discourage contractors from ordering equipment straightaway, he expects dealers and manufacturers to get an immediate benefit from parts and service.

Another possible upside for the industry? Demand for new and used equipment from China has continued to be strong throughout the downturn. No one is sure, not even auctioneers, how much of the surplus equipment has already disappeared overseas. But the dollar’s weakness during the downturn has probably accelerated that drain -- and encouraged other global bargain seekers to buy idle U.S. equipment.

“I don’t think anyone knows for sure where all these machines went,” says J. Scott Hazelton, an economist at IHS Global Insight.

“But a lot of them left the U.S.”

Reporting by James B. Kelleher, editing by Matthew Lewis

Our Standards:The Thomson Reuters Trust Principles.
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