While other sectors of the U.S. economy are recovering from the recent recession, the construction industry remains mired in a deep depression.

During the first seven months of 2009, construction spending fell more than 10% below the anemic level of spending during the same period last year. The downturn has taken a significant toll on construction workers. The economy has lost an average of 117,000 construction jobs per month over the last six months, and employment in the construction industry has contracted by 1.4 million since the onset of the recession. The construction industry unemployment rate in August was twice what it was a year ago and nearly twice that of the economy as a whole.

The sharp drop in construction activities and production of construction materials (e.g., asphalt, cement and aggregates) have led to a sharp decline in equipment purchases. Just how bad is it for the construction equipment industry? A study, conducted in September by IHS Global Insights for the Associated Equipment Distributors (AED) and Association of Equipment Manufacturers (AEM), paints a bleak picture:

“The current recession has placed a severe drag on the construction equipment industry, which is consequently holding back the broader economy from recovery,” said Scott Hazelton, director of construction services for IHS Global Insight and principal author of the study.

It’s for all the foregoing reasons that AED and AEM recently combined forces to launch an aggressive campaign — 
branded Start Us Up USA! — to tell the industry’s story on Capitol Hill and enact legislation to turn things around. Here’s what we’re telling Congress to do:

Invest in Critical Infrastructure
Invest in critical infrastructure by swiftly passing multi-year reauthorization bills that increase investment in the nation’s highways, public transportation, bridges, sewers, drinking water systems and airports.

There’s a strong market correlation between public spending on infrastructure and equipment markets. A study conducted last summer by Dr. Stephen Fuller of George Mason University in Fairfax, VA found that each dollar in public spending on roads creates 6.4 cents in equipment market opportunity (i.e., contractor spending on equipment purchases, rental, lease, and maintenance). The federal government currently spends about $41 billion per year on roads. The annual market impact of that spending on the equipment industry is around $2.5 billion.

With that strong nexus between infrastructure spending and the equipment industry in mind, it’s no wonder that what’s happening (or not happening) on Capitol Hill is having a big impact on equipment distributors.

SAFETEA-LU, the 2005 federal highway law, expired on Sept. 30, 2009, and Congress has been dragging its feet when it comes to getting a new multi-year bill in place. As is so often the case, the problem is money. The federal highway program is supported entirely by user fees (e.g., the 18.4 cent gas tax, diesel taxes, heavy truck excise taxes, etc.). However, the revenues they bring into the Highway Trust Fund (HTF) aren’t even sufficient to support the current level of investment, let alone the doubling of the program that so many public and private studies have said is necessary to sustain America’s future economic competitiveness. AED is on the record as strongly supporting a gas tax increase as the fiscally responsible solution. Unfortunately, there are too few members of Congress at the moment willing to do the right thing and the highway bill is therefore stalled.

Congress’ failure to reauthorize the federal highway program in a timely manner is adding to historic uncertainty in equipment markets. “Contractors lack confidence in the long-term demand for their services and are therefore refraining from purchasing new equipment. As a result, equipment distributors have seen sharp declines in sales,” Tom Kirchhoff, executive vice president and COO of Cleveland Brothers Equipment Co. told a House panel this summer.

Water infrastructure legislation also has a big impact on equipment distributors. A study conducted by the National Utility Contractors Association (NUCA) and AED last summer found that 12% of the average underground water utility bid is attributable to equipment costs. In other words, one dollar of spending on sewers and drinking water systems yields almost twice the market impact of one dollar in highway spending. However, water infrastructure gets much less from the Feds than highways. (The House of Representatives has passed appropriations legislation that would increase funding for water infrastructure to just under $4 billion in FY 2010.)

Like the highway bill, legislation to dramatically increase water infrastructure investment is also in a holding pattern on the Hill. AED and AEM are pressing Congress to get these bills done.

Enact Tax Legislation
Enact tax legislation that encourages new equipment purchases, including creating new investment tax credits for clean diesel equipment purchases and engine retrofit and extending the American Recovery & Reinvestment Act’s (ARRA) depreciation bonus and increased §179 expensing levels.

This year’s stimulus bill included a 50% depreciation bonus for new equipment purchases and higher §179 expensing levels (Visit http://www.depreciationbonus.org for more information). Unfortunately, those capital investment incentives expire at the end of the year and, given the volatility in construction markets, haven’t had much positive impact on the industry in 2009. AED and AEM are therefore urging Congress to extend those tax incentives to encourage contractor equipment purchasing next year. Combined with new infrastructure legislation, they could be particularly powerful stimulus for the industry.

Our organizations are also asking Congress to create new tax credits for “clean diesel” equipment and would encourage contractors to buy newer, cleaner, safer machines and upgrade existing fleets.

Extend/Expand Net Operating Loss Carry-Back Rules
Extend and expand net operating loss carry-back rules. This year’s stimulus bill allows companies with $15 million or less in revenues to carry back net operating losses (NOL) from 2008 for up to five years.

This effectively allows struggling companies to re-file tax returns and apply current losses to past years. This in turn frees up cash now for struggling companies to help them meet payroll and keep the doors open. The equipment industry believes that these tax benefits should be extended to apply to 2009 losses and expanded to allow bigger companies (i.e., those with revenues exceeding $15 million) to benefit.

Sustain Long-Term Recovery
Sustain long-term recovery in the residential real estate market by extending and expanding the home purchase tax credit.

Given the significant market impact of the residential construction industry on equipment distributors, getting the real estate market back on track is a top equipment industry priority. AED was the first trade association to propose a home purchase tax credit early last year. Congress created a tax credit for homebuyers during the summer of 2008 and expanded it in the stimulus bill. Since then, existing home sales have increased for four consecutive months for the first time in five years. Unfortunately, the current benefit only applies to first-time homebuyers, is phased out for taxpayers with incomes above $75,000, and expires at the end of November.

We think Congress should extend the tax credit for an additional year and eliminate income eligibility and first-time homebuyer requirements to enhance the credit’s effect and help sustain broad recovery in the real estate market. This will help get home construction back on track.

Improve Access to Credit
Improve access to credit for purchasers, distributors and manufacturers, as well as for commercial and residential developers.

Eighty-one percent of the respondents to a spring 2009 AED survey reported that they had lost sales in the last year because qualified purchasers had been unable to secure financing. The survey respondents reported lost sales exceeding $120 million. When the survey results are projected across the association’s entire membership, AED calculates distributors have lost more than $720 million in sales because credit was unavailable. Dealers also report that credit to run their companies is harder to find and more expensive. Now we’re hearing that tightening in lending for commercial development projects is starting to hurt the pace of residential construction.

With all that in mind, Congress and the Obama administration must pursue policies to improve access to capital and ensure that contractors are able to buy equipment, distributors and manufacturers have the resources they need to run their companies, and developers are able to secure financing for new construction projects.

Get Involved, Get Active, Make it Happen!
That’s a pretty aggressive agenda for the equipment industry to be pursuing. While both AED and AEM have excellent teams of lobbyists working on the industry’s behalf in Washington, D.C., we can’t do it alone. Ultimately, our success will depend on the willingness of distributors, manufacturers and industry employees around the country to step up and get engaged in the legislative process. If they do, there’s a chance we can turn things around and get the industry back on track. To find out what you can do to help, visit http://www.StartUsUpUSA.com.