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Don't count on stimulus to rejuvenate equipment sales.

As the new president is getting his administration in gear, there is plenty of talk about the stimulus plan to get the economy going again. I have fielded numerous inquiries on this and have given a lot of thought to what might happen as a result of Uncle Sam pouring billions of dollars into construction, tax credits, tax cuts, health and educational reforms and bailouts of one sort or another.

When one starts thinking in terms of $825 billion or more in new spending, we figure that roughly $90 billion to $100 billion will be portioned for infrastructure construction work over a two-year period, but that is not set yet. It sounds like we are going to pave and widen most of the interstate highway system, rebuild bridges more than 20 years old, install high-speed rail services between major cities and upgrade big city airports. However, the money allocated will only go so far (and hopefully will not get spent on "bridges to nowhere.")

Funds for construction will certainly help the economy in one respect. There are several million ex-construction workers out there that cannot easily get re-employed, and the money getting thrown at "Fix America" will surely help those folks.

The big question concerning the stimulus package that can't easily be answered is how the machinery industry will fare and which suppliers or which products will get a boost when funds actually start flowing. Will Caterpillar sell more excavators and dozers? Will John Deere, CNH, Volvo or JCB see better sales? Will the rental equipment industry start growing again? Will crane sales catch fire when thousands of bridges get repaired or renewed? The list is endless.

Let's be realistic. Very little of what gets approved in Washington this year--even early in the year--will get to anyone during 2009, at least from a machinery standpoint. "Shovel ready" is a joke and anyone looking at how things get done in construction knows that shovel ready means "manana"--or more precisely, six to 12 months before anything gets moving.

Once the funds are allocated to the states from the feds, it will take time for companies to be picked to do the work and then it will take time to move forward and actually get projects started. Lining up people and equipment also requires time. On the equipment front, no thought will be given by any contractor to run right down to the local dealer and buy new equipment. That's the last thing that will happen.

By 2010, I rather imagine that OEMs will get some new business stemming from Washington's handout, but don't hold your breath and don't expect it to replace the business lost in 2008 or 2009. We're facing a giant pothole in the road and it's more like a sinkhole, the kind that swallows cars and SUVs whole.

Right now, there appears to be more than enough machinery already in the hands of contractors and at rental houses to take care of any initial requirements brought about by the stimulus package, which is why I am not too excited about the near-term benefits for machinery suppliers. I can't see the OEMs needing to ramp up for big production runs on backhoe loaders or excavators any time soon.

There is a longer-term payoff for OEMs and a happy ending to this story. Machinery that is idle does not age very much. Machines that are at work need to be replaced more quickly. That's the good news. The equipment population constantly needs to be purged of old stuff, and contractors do that when profits and business are positive. By 2011, the stars should line up again like in 2003 and a new cycle of buying will begin.

This doesn't mean that some of the funding coming down from Washington won't hit the marketplace in 2010--it will. But the real demand for equipment will return in 2011 after the economy is back on its feet and people have some money in their pockets.

But this pothole in the road cannot be fixed with stimulus money alone. We need to get the housing industry back on its feet. Inventories of unsold houses have to be worked off and foreclosures reduced considerably. Credit will be much tighter (we hope) on the next cycle and we will have to wait and see how interest rates are faring when people are ready to start buying again.

The process cannot be forced; it has to happen on its own. And I doubt that we will see another "housing bubble" during the next decade.

So bring on the big bucks and let's start fixing things. Like medicine, it could help the sick patient feel better and, regardless, it will make the patient feel like something positive is getting done. Furthermore, a bunch of workers will get to work again that might otherwise be sitting around for years. That's progress, and we need as much of it as we can find these days.

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Comment:Don't count on stimulus to rejuvenate equipment sales.
Author:Yengst, Charles R.
Publication:Diesel Progress North American Edition
Geographic Code:1USA
Date:Feb 1, 2009
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