Is Help on the Way?

Obama administration implements massive economic stimulus plan

The federal government has taken several steps in an attempt to jump-start the U.S. economy amid the ongoing recession. At an estimated cost of $787 billion, the American Reinvestment and Recovery Act of 2009 has generated both strong support and intense opposition from politicians and economists. The legislation contains a mix of targeted tax cuts, financial aid to state governments, and increased spending.

The economic stimulus package includes the following measures:

Tax relief and financial assistance for individuals and families

For the 2009 and 2010 tax years, the plan provides a “Making Work Pay” tax credit of up to $400 for individuals and $800 for families. The credit will be phased out for individual taxpayers with adjusted gross incomes exceeding $75,000 and above $150,000 for married couples filing jointly.

The economic recovery act continues the Emergency Unemployment Compensation program through the end of 2009, and allows for an additional seven weeks of extended benefits for workers who live in states with extremely high unemployment. Additionally, the first $2,400 of benefits for each recipient will be exempt from federal income taxes for the 2009 tax year.

Financial aid to states

The federal government will increase Medicaid assistance retroactively for all states over a 27-month period from October 1, 2008 to December 31, 2010. The legislation also provides financial aid to states for renovations and repairs to public schools, and increases funding for education in an effort to prevent job losses and reductions in services.

More funds for infrastructure projects

The economic recovery package contains significant increases in spending on construction and improvements for highways and bridges. The plan also seeks to make it easier for states and municipalities to finance infrastructure projects through tax reductions and the creation of several new types of municipal bonds.

In a separate action, the Obama administration unveiled a program that enables some homeowners who have little or no equity in their homes — or have houses that are worth less than their mortgage balances — to refinance their loans. The federal government has allocated $200 billion to Fannie Mae and Freddie Mac, the government-controlled mortgage lenders that will provide the financing for these loans.

The administration has set aside an additional $75 billion to encourage lenders to modify loans for homeowners who either are in or at risk of foreclosure. The program calls for lenders and the federal government to share the cost of reducing monthly mortgage payments to 31% of borrowers’ household incomes, and offers financial incentives to both lenders and homeowners if borrowers stay current on their mortgage payments. The program applies only to owner-occupied homes with mortgages owned or guaranteed by Freddie Mac or Fannie Mae, the two government-sponsored enterprises, subject to the Federal Housing Finance Agency’s conforming loan limit of $729,750.

President Obama has indicated that these actions most likely are only the first steps in the administration’s economic stimulus efforts.

Here at Aberdeen...

We agree that additional measures will be needed and there will be heated debate among legislators in both major political parties. Depending on the final form of the package, it could have a broad impact on stocks. Engineering and construction firms could be helped by the expansion of construction and the financing of existing projects. Firms that supply basic materials — including steel — and capital equipment may find stability in pricing and business volumes.

The market is also concerned with how the government plans to pay for its bills. Healthcare savings plans, higher taxes paid by households that are considered “wealthy” (primarily those with incomes above $250,000) and corporate tax regulations have separate and negative consequences, feeding the concern of the Obama plan’s viability in its current form. However, it is consumer and corporate confidence that is sorely missing in the current economic environment, and we feel that any improvement in these areas may help build a floor in the economy and the markets.

“For equity investors with a long-term perspective, panic and market volatility has led to — and continues to lead to — opportunities to invest in companies with sustainable business models, healthy balance sheets and experienced, trustworthy management, at inexpensive prices,” Bruce Stout, Senior Investment Manager, Aberdeen Global Equities.

Back to Investor Resources Main Page