The infrastructure bill and other domestic spending takes center stage

Updated August 27 | Market news

Infrastructure investment stands atop the list of significant legislation under consideration by policymakers in Washington. Following on the heels of the American Relief Plan that passed earlier this year, some view a sizable infrastructure plan as another potential shot-in-the-arm for the recovering U.S. economy. The U.S. Senate passed a $1.2 trillion infrastructure package in August. Action awaits in the House, but House Speaker Nancy Pelosi has committed to a vote on the package by late September.

Another key piece of legislation is under consideration in conjunction with the infrastructure proposal. A budget resolution currently valued at $3.5 trillion proposes additional spending on socially focused domestic programs and would also be connected to a number of new taxes that would presumably fund the spending package.

At the top of the agenda

After months of negotiations, the infrastructure bill gained bi-partisan support in the U.S. Senate. The package passed easily and was sent on to the House of Representatives, although the timing of House approval is up in the air. “House Speaker Nancy Pelosi has stated she wants to ensure there are votes on both the $1.2 trillion infrastructure bill and the additional $3.5 trillion budget package,“ says Kevin MacMillan, head of government relations at U.S. Bank. In fact, the House passed a $3.5 trillion budget resolution on a Democratic party-line vote of 220-212 in late August, which also advanced the Senate’s bipartisan infrastructure bill. The vote allows Democrats to write and approve a spending package without Republicans and puts the infrastructure plan on a glidepath to final passage in the House. House action came after several moderate Democratic members sought a separate, earlier vote on the $1.2 trillion infrastructure package.

MacMillan was not surprised to see some representatives push for faster approval of the smaller infrastructure bill. “A number of incumbent legislators who are up for re-election in 2022 would like to see money flowing from this bill to major projects in the areas they represent as soon as possible.”

In its current form, the infrastructure bill includes $550 billion in “new” spending above baseline amounts that were expected to already be in place under current budgets. Of that, more than half is targeted to transportation projects. This includes $110 billion for major road and bridge work. $66 billion is directed to passenger and freight rail and $39 billion to improve public transit. The rest is spread among other areas such as airports, ports and waterways, electronic vehicle infrastructure and electric buses.

Another $264 billion is directed toward other types of infrastructure work. That includes power infrastructure (such as improving the electrical grid), broadband expansion, water projects and environmental remediation.

The economic impact of the infrastructure bill

Although $550 billion in new spending is below some of the initial proposals put forth by the Biden administration it is still, particularly when combined when baseline infrastructure spending, a significant number. MacMillan points out that the infrastructure package passed during the early years of President Barack Obama’s term was a five year plan valued at $305 billion. It appears that the current infrastructure package will dwarf anything that preceded it.

“The economic impact may be limited because the spending doesn’t happen all at once,” says Eric Freedman, chief investment officer at U.S. Bank. The current proposal targets spending most of the approximately $1 trillion package over a five-year period. “With this time period and the scaled-back scope of the infrastructure package compared to original proposals, the infrastructure bill isn’t likely to have a dramatic impact on the markets,” says Freedman.

One challenge in that regard is tied to the number of projects that are in the pipeline and could be initiated on short notice. “So-called ‘shovel-ready’ projects can be limited, and even to some extent not fully ready to hit the ground running even though the money is in place,” says Rob Haworth, senior investment strategy director at U.S. Bank. “You have to be able to identify projects that can be initiated.” Haworth notes that any holdup could delay how quickly projects begin to have an economic impact. Even at that, MacMillan points out that there is often a six-month lag between the time a spending bill becomes law and the point when actual funds begin flowing from it.

The American Rescue Plan and other COVID-19-related relief packages that injected trillions of dollars into the U.S. economy dating back to early 2020 were meant to have an immediate economic impact. An infrastructure plan should be looked at differently, notes Haworth. “Infrastructure spending is meant to create a foundation for future growth. This legislation is not aimed so much at driving baseline growth today but helping drive potential growth for years to come.”

For example, making improvements to an airport that could result in higher airline traffic in the future would provide a long-lasting economic boost to the communities it serves. Road improvements might create more opportunities for the development of business districts on or near the affected roads. These examples demonstrate why infrastructure can be considered an investment by government in the long-term economic health of the nation.

Challenges facing the $3.5 trillion budget package

While the infrastructure bill seems to be on track for approval by late September, less certain is the status of the $3.5 trillion budget package. Specific elements and expenditures in the bill still need to be worked out and some Senators have already indicated they believe the total size of the package is too large. The House is expected to put the final budget package to a vote at some point this fall, possibly in advance of the smaller infrastructure bill, but this detailed legislation will then require Senate approval. Democrats, who control both houses of Congress, are not likely to receive any Republican support for this package, so virtually all Democratic votes need to be lined up to support the final bill.

In its current form, this package focuses on four key areas of spending:

  1. Families – this includes funding for universal pre-K for 3 and 4 year olds, child care benefits for working families, paid family and medical leave benefits, tuition-free community college and enhanced Pell grants.
  2. Healthcare – new spending for dental, vision and hearing care for Medicare enrollees, expanding the Affordable Care Act, reducing prescription drug costs for seniors, home and community based care for seniors.
  3. Infrastructure and Jobs – increased investment for construction of public housing and sustainable housing, rehabilitation of Veteran’s Administration facilities, establishing a Civilian Climate Corps, smart technology projects and job training programs.
  4. Climate – funding to support clean energy projects, manufacturing tax credits and tax incentives for green programs, smart agricultural and forest programs, transforming the entire federal fleet to electric vehicles.

MacMillan notes that several Senators who approved the framework of the larger package believe it is too large in its current form. He expects to see the final bill to fall below the current price tag of $3.5 trillion.

Another aspect of this legislation is raising tax revenue to pay for it. “Tax hikes would, to some extent, moderate the lift that higher spending creates for the economy,” says Haworth. “New taxes tend to hit hardest when they’re first implemented, and then over time, those who are affected by it adjust and resume more normal spending activity.” Extensive tax policy changes have been proposed, but the details continue to be worked out. Among the provisions being considered are higher corporate tax rates, raising rates on higher income individuals, changes to capital gains tax rates and revisions to estate tax rules.

Investment implications

It may be too early to predict which industries are best positioned to capitalize on increased government spending on infrastructure. “Basic materials, industrials and transportation are sectors that should be positioned to benefit,” says Freedman. “Most or all of the money in the infrastructure bill goes toward new roads, bridges and other construction projects.”

Haworth notes that investors may need to look for specific opportunities within the affected industries, as those categories include a broad range of companies. “For instance, in the materials sector, many of the largest components are chemical companies, which are not likely to be directly impacted by infrastructure spending.”

Assuming the infrastructure bill promotes more economic growth, it should be considered a positive factor for the markets. What’s not clear is whether investors have anticipated the legislation and already priced its impact into the market’s value.

Federal funding of major spending projects may also be beneficial for municipal bonds, suggests Freedman, as it would put communities that bond for projects in a stronger financial position. If deficit spending is required to fund all or part of the package, the increase in government debt could potentially have negative ramifications for the bond market. That may put upward pressure on interest rates, but it is not yet clear whether that will become an issue.

Another consideration in your investment strategy

Chances are that passage of the infrastructure package and the larger budget bill under consideration should not alter your investment strategy in any sizable way. However, it may open to the door to specific investment opportunities, depending on the final elements in the bill. Changes to tax law may also have an impact on how you position assets.

Consider talking with your wealth planning professional about how any specific opportunities and tax considerations related to pending legislation might affect your overall investment strategy.

 

Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.

Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer's ability to make principal and interest payments. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes. There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults).

Recommended for you

 

Building your portfolio

We construct custom portfolios based on your goals, risk tolerance and desired outcomes.

See investment portfolios

How Biden’s tax policy changes could affect you

A variety of proposals are being considered that could result in a dramatic alteration in tax policy.

Read about potential changes

The markets and the Biden administration

We take a look at how the markets have fared so far and what to expect going forward.

Read article