Shifting into neutral

In the American financial system, the economy is governed by two separate but equally important groups: The Federal Reserve, which controls monetary policy, and Congress, which controls fiscal policy. These are their stories.

For the past seven years, the Fed has done nearly all the work of trying to raise the economy out of the worst recession since the Great Depression. The Fed has not only cut rates, but launched three massive bond-buying programs to keep long-term interest rates low. By keeping rates low, the Fed has allowed millions of homeowners to refinance their mortgages at lower rates, and allowed businesses to refinance their debt at lower rates as well.

Moody’s Baa-rated corporate bond yields

In both cases,the Fed’s actions have put money back into the pockets of consumers and businesses. Reducing your debt payments is essentially the same as increasing your revenue, all other things being equal.

At this point, the Fed has pretty much used up all its ammunition. Short-term rates are at zero, and the Fed would love to nudge rates higher, if only to give it some room to cut rates during the next recession. Higher mortgage rates would probably spur some brief buying as purchasers scramble to get into the market before rates get too high. And it wouldn’t hurt that long-suffering savers got some return on their investments.

While the Fed has been working hard, the fiscal side of the ledger has been hardly working. During a recession, business spending dries up entirely, as companies focus on survival, rather than expansion. Unfortunately, the net effect of cutting business spending in a contraction is further contraction. When you lay off workers — or even when other companies lay off workers — they cut back spending sharply.


State and local governments, which were in reasonably good shape before the recession, also cut spending. While many states had rainy-day funds, no one expected a downturn of the severity of the 2007-2009 recession.  As a result, teachers, construction workers, police, fire and medical personnel also joined the ranks of the unemployed at an unusually harsh rate. No matter what you feel about government spending, an unemployed teacher is just as unemployed as an unemployed plumber. And, if you’re traveling across country, check out the state of the highways you drive on. If you need a new front-end alignment after your trip to Lake Wippitysnappity, it’s probably because of big cutbacks on basic structures.

State spending in 2009 dollars

Federal spending, too, has been remarkably restrained for a recessionary period. The $152 billion Economic Stimulus Act of 2008, signed into law by President George W. Bush, was primarily tax rebates and tax incentives for business. The $831 billion American Recovery and Reinvestment Act of 2009, signed into law by President Barack Obama, had $288 billion in tax cuts and $105.3 billion in infrastructure spending.

As the economy has recovered, however, state and local spending has started to pick up — as have tax revenues. According to the Brookings Institution, government spending has gone from a net negative for the economy to a net neutral the past 12 months. (For those who argue that government doesn’t create jobs: Please say that to a policeman or fireman and report his response to me. I’ll wait.)


Should the Federal government actually create a long-term fix for the federal highway fund and should state and local governments resume maintaining infrastructure at previous levels, you might start looking at domestic infrastructure companies.

A few suggestions:

* A.O. Smith (ticker: AOS) is in the prosaic business of boilers and heaters, which sounds uninteresting until you remember that every building in the country — including public ones usually needs one.

* Chicago Bridge and Iron (CBI), provides conceptual design, technology, engineering, procurement, fabrication, modularization, construction, commissioning, maintenance, program management, and environmental services worldwide.

* Cummins (CMI), ubiquitous maker of engines, especially those found in heavy equipment.

None of these are guaranteed, of course. But if you think U.S. infrastructure is going to start rising again — and for the sake of my poor car’s front end, I hope so — these might be a good place to start.



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