Inside the Infrastructure Bill
President Biden, referring to the infrastructure and Build Back Better agendas: “If your primary concern right now is inflation, you should be even more enthusiastic about this plan.” (1).
The package of continued spending from this government focuses on traditional forms of infrastructure, such as roads, bridges, water systems and cyber services. While infrastructure, in the long term, will enhance the supply side of the economy and help keep inflation low, its effects in the short term will likely be the exact opposite (2).
The infrastructure and Build Back Better plans are designed to be long-term packages that increase the capacity of the economy through investments in physical infrastructure, human capital, clean energy, housing, and health care. Below is a list of the areas highlighted by the bill for investment:
Figure 1: Breakdown of infrastructure bill spending, Graph by CJE Financial LLC, data by whitehouse.gov
Poor Timing
The National Bureau of Economic Research (3) recently published a paper that found little sign of stimulus effect with regards to an infrastructure package. Drag occurs in part because building new infrastructure disrupts the use of existing infrastructure, braking the economy’s supply side, not stimulating it. During road construction, for instance, traffic increases substantially falling only after the project is completed. More traffic increases the amount of time it takes for the economy to produce the same amount of goods and services, which pushes prices higher. Similar effects will be felt across the entire economy, as the bill reaches into all aspects of daily infrastructure.
More traffic increases the amount of time it takes for the economy to produce the same amount of goods and services, which pushes prices higher. Similar effects will be felt across the entire economy, as the bill reaches into all aspects of daily infrastructure.
Interestingly, the bill attempts to spend a majority of the funds allocated within the first five years of its implementation. This front end-loaded effort appears to be designed to have a more immediate impact to the economy and the communities benefiting from the projects (4). As such, construction businesses, as well as others that benefit residually, will stand to gain the most from this immediate short-term spending. For example, making improvements to airports could lead to higher airline traffic and provide a significant long-term boost to that community and surrounding ones. Road improvements, receiving a bulk of the funds, creates opportunities for business districts, strip malls, etc. to develop. As such, the infrastructure spending is meant to create a foundation for future growth.
However, as the nation desperately needs improved infrastructure, the timing of such repairs only exacerbates current inflationary concerns. Many hidden inflationary components are secretly layered within the package. For example, new cars would be mandated to have breathalyzer and eye-tracking technology to curb drunk driving. It would also require climate technology to prevent children from being locked in hot vehicles. Finally, new cars would be required to be equipped with safety technology, such as emergency breaking, crash-avoidance systems, specialized rear guards, and lane-departure warnings. Naturally, as car manufacturers incur increased costs to produce a vehicle, consumers will be asked to pay more as well. In a time when supply crunches are rippling through the world economy, spanning from record used car prices to chip shortages, consumers may have a tough time embracing additional costs in their everyday lives.
Investment Opportunities
Focusing on the investment opportunities arising from the infrastructure package, there seem to be various sectors of the market that stand to benefit, although it is generally still too early to tell. As previously mentioned, with the focus being on traditional infrastructure, sectors such as basic materials, industrials, and transportation sectors seem to be the standout winners on the initial review. However, if projects are implemented efficiently, effectively all sectors of the market would see benefits. In addition, as these projects require upkeep in future years, state and local governments will turn to the municipal bond market to finance the obligations, thus creating a potentially attractive market for tax-free debt.
All in all, the infrastructure bill, along with what’s to come with the proposed $3.5 trillion spending spree, should not alter your investment approach or strategy. As it stands to benefit various parts of the equity and debt markets, we continue to stand by broad market diversification, as well as a focus on long-term investment needs, rather than short-term market trends or events
1) White House, August 23, 2021
2) WSJ, August 8, 2021
3) National Bureau of Economic Research, July 2020
4) US Bank, August 27, 2021