United States Infrastructure Report Q4 2008

The credit crunch, initially triggered in 2007 by the downturn in America's residential property market and associated securities, snowballed during September 2008 into a full blown financial crisis. This intensification of the crisis sent interbank interest rates soaring and threatened to starve even the most well-run companies of liquidity. This bodes poorly for commercial construction, as construction companies find it increasingly difficult to access funding to complete existing projects, and firms across the country abandon expansion plans. In this context, we have revised down our infrastructure forecasts this quarter. We now predict that construction across the US as a whole will register real growth of -1.9% in 2008, before only a modest recovery to 2.4% in 2009 (compared to our previous forecasts of 0.8% in 2008 and 4.9% in 2009). Were it not for the support provided by the public sector, construction would be moving into deep recession. Indeed, significant public sector contracts continue to offer support to the industry, especially expenditures on highway construction, power projects and, to an extent, airport upgrades.

Risks to our forecasts are to the downside. Much depends on the duration of the financial crisis, as a further drying up of liquidity would mean that even some of the best-run companies would not be able to carry forward their operations. Moreover, while our core scenario envisages that public sector tenders will lend support to the overall construction outlook, government bailouts of failing banks could force the authorities to retrench on infrastructure investment.

Special Focus: US Presidential Elections The outlook for infrastructure is heavily dependent on who comes to power in the presidential elections.

Democratic candidate Senator Obama has already indicated that he would be willing to prime the fiscal pump via infrastructure investment, while Republican Senator McCain is much less enamoured by this approach. We consider the differences between their positions, as part of a broadened 'Market Overview.' Company Profiles We consider the outlooks for Bechtel and KBR, including how resistant their financial situations and order books may prove to the ongoing dislocations in financial markets and consequent declines in GDP growth in key markets.