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President Biden has announced his $2.2 trillion American Jobs Plan (AJP) which
the administration is promoting as an 'infrastructure bill'. While
it does contain a healthy dose of needed infrastructure spending,
it also includes billions for items such as incentives to purchase
electric vehicles (EV) which go beyond any definition of
infrastructure. It would be more accurately described as an
'investment bill'.
The most widely recognized infrastructure needs assessment comes
from the American Society of Civil Engineers (ASCE). As such, it
makes sense to use their definition of infrastructure:
transportation (aviation, roads & bridges, ports & inland
waterways, rail & public transit), broadband communications,
power & energy, public health management (solid waste,
hazardous waste, sewer & stormwater, drinking water) and
conservation and development (dams, levees, public parks). The ASCE
also includes schools. In their 2021 Report Card for America's Infrastructure,
they peg the infrastructure funding gap at $2.6 trillion by 2029,
given current and projected needs and funding commitments. Not that
closing this gap would take their report card grade to a 'B'; it
reflects the difficulty in achieving everything.
Using the ASCE framework, roughly $900 billion of the
$2.3 trillion would be considered infrastructure. It's
also important to note that the construction sector will be
impacted differentially from infrastructure. Some infrastructure
spending does not result in construction activity - for example,
modernizing public transit includes the purchase of buses and rail
cars. However, there are also investment dollars that would not be
considered infrastructure, but which will result in construction
activity, for example, much of the $213 billion allocated to
affordable housing. It is very difficult to assess the construction
market impact from the level of detail currently provided. It is
important to note that the documents that have been published are
policy statements, not legislation. However, based on a rough
assessment of the goals released, we believe that around
$1.1 trillion, or nearly half the package, would accrue to the
construction industry.
The breakdown
The transportation component of the
package accounts for $621 billion of AJP spending. The largest
element in the transportation component is EV at $174 billion, yet
only the charging network, a relatively small component, would be
considered infrastructure and offer an opportunity to the
construction sector. Some of the additional provisions include $115
billion for road and bridge repair, $85 billion for public transit
modernization, and $80 billion for passenger and freight rail.
Other key provisions include
investments in a mix of infrastructure and residential, commercial,
and institutional structures that will create opportunities for the
construction sector. These include $100 billion each for broadband,
power infrastructure, and public school modernization and $213 for
affordable housing.
Finally, a third set of provisions include investments that
could improve economic efficiency and competitiveness but offer
relatively few construction opportunities. Some highlights of this
set include $400 billion for essential home care workers, $100
billion for workforce development, and $300 billion for supply
chain and manufacturing. (See our breakdown
provisions)
Timing
The spending occurs over 8 years. Speaker Pelosi has set July 4
as a target date for the legislation to pass the House, but it
would also need to clear the Senate. There is potential for the
bill to pass after Congress' August recess, but it could extend
until fall. Even then, projects will need to be planned and
permitted. Any appreciable impact to construction markets would not
be felt until 2022.
The timing creates a further complicating factor. It appears
that this spending supplements the FAST Act, aka the 'Highway
Bill', which expires at the end of September. There are indications
that the Biden administration intends to renew that program in the
fall as well, perhaps making changes to create less dependence upon
the gas tax. For comparison purposes, the FAST Act of 2015
authorized $305 billion over 5 years, which suggests an average
annual spend of $61 billion. If one removes the EV component of the
transportation segment of the AJP, the result is $55.9 billion of
annual average spend. While the AJP is an ambitious policy
prescription, its impact on transportation infrastructure is
actually less than that of the Highway Bill. Both measures
together, however, would create expanded opportunities for
contractors, construction material suppliers and equipment
producers, and rental companies.
What it means for the industry
Of course, the $1.1 trillion in estimated construction spend
translates to $137.5 billion per year. While it's not strictly
apples and apples, the Value of Construction Put in Place for 2020
was $1.36 trillion. While much remains to be ironed out in the
details, the AJP has the potential to add 10% to the construction
market in the coming years.
To put the scale of this plan in the context of President
Obama's American Recovery and Reinvestment Act (ARRA) of 2009, that
stimulus package, which was intended to reverse the Great Financial
Recession of 2008, was $831 billion over 10 years. The
transportation infrastructure element was $51.2 billion, or only
$5.1 billion per year, about 1/10 the size of the AJP.
Interestingly, there was $7.2 billion for public broadband even
then, $8.2 billion for affordable housing, and $38.8 billion for
various energy-related projects. One of the criticisms leveled
against the AJP is the relatively small impact that the ARRA had on
the economy in 2009. As this comparison indicates, the AJP is a
significantly more potent prescription.
Indeed, it is fair to ask whether the economy can even absorb
all this spending. The AJP comes on top of the recently enacted
American Rescue Plan, which provides $350 billion in unrestricted
aid to state and local governments. While state and local governments
have many needs, some of this money could find its way to
infrastructure in the short term. While the construction market,
and particularly residential construction, were Ground Zero of the
Great Financial Recession, construction was among the lighter
impacted sectors of the pandemic-induced recession. Residential
construction was only seriously affected in 2020Q2 and is already
on the mend. The February architectural billings index data from
the American Institute of Architects moved into positive territory
for the first time since the beginning of the pandemic, which
suggests that non-residential structural construction put-in-place
could improve in 2022. With the supply of skilled workers likely to
be tight by 2022, there may be constraints on how fast this
spending can be implemented, especially in the hot housing
market.
The Biden administration proposes to pay for the AJP spending
over 15 years via a miscellany of corporate tax increases. While
the headline feature is an increase in the corporate tax rate from
21% to 28%, there will also be a tax increase on corporate
foreign-sourced income and a 15% minimum tax on large corporations
who may currently pay low or even no taxes. There will also be the
elimination of certain tax incentives and regulations to prevent
corporate inversions. Since the spending occurs over 8 years, while
the tax increases occur over 15, the net impact to the overall
economy is mildly stimulative. There will be significant winners
and losers within specific sectors, however.
The political calculus of the AJP is complicated by its size,
scope, and the taxation to pay for it. Republicans are largely
skeptical of the entire package, but even some Democrats are
concerned about corporate tax increases, and not even spending
items will be equally popular. One should expect changes to the
plan as it evolves into legislation that can get enough votes to
pass. In the meantime, managers and executives should be closely
examining the elements most applicable to them in order to make
informed suggestions to your elected representatives. IHS Markit
will be continually updating our perspective as this initiative
moves through Congress.
Posted 12 April 2021 by Scott Hazelton, Director, Construction, S&P Global Market Intelligence
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