The infrastructure bill and other domestic spending takes center stage

Updated November 9 | Market news

A major $1.2 trillion infrastructure plan was approved by Congress and will become law. Following on the heels of the $1.9 trillion American Rescue Plan that passed earlier this year, some view a sizable infrastructure plan as another potential shot-in-the-arm for the U.S. economy.

Another significant spending package, known as the Build Back Better plan, remains under consideration in the House and Senate. This budget resolution, currently valued at $1.75 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 in August. Then it was then mired in negotiations in the House tied to the Build Back Better Act. The infrastructure plan finally gained House approval in early November with most Democrats and a small group of Republican legislators voting for passage.

Kevin MacMillan, head of government relations at U.S. Bank, says that passage of the infrastructure bill was becoming more urgent. “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.” MacMillan points out that there’s often a six-month lag between the time a spending bill becomes law and the point when actual funds begin flowing from it.

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.

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. The infrastructure plan that just passed 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.

“Build Back Better” awaits approval

With the infrastructure bill passed, Congress is still awaiting votes on the Build Back Better Act currently valued at $1.75 trillion. This has been cut back significantly from an original proposal that totaled $3.5 trillion, but still represents a major initiative. The House is expected to put this bill to a vote at some point in November. 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 ensure final passage.

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 and tax credits of up to $300 per child per month.
  2. Healthcare – more financial assistance for those covered under the Affordable Care Act, reducing prescription drug costs for seniors and expanding Medicare to cover hearing aids.
  3. Housing – increased investment for public housing and rental assistance programs and enhanced down payment assistance programs to promote home ownership.
  4. Climate – funding to support clean energy projects, manufacturing tax credits and tax incentives for green programs, and a new Civilian Conservation Corps to put young people to work restoring wetlands and other climate-related initiatives.

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 a new minimum corporate tax rate, a tax surcharge on the wealthiest Americans, and a surcharge on stock buybacks.

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.” Nevertheless, in the immediate wake of Congressional passage of the infrastructure plan, stocks of companies with an infrastructure focus performed very well.

Assuming the infrastructure bill promotes more economic growth, it should be considered a positive factor for the markets. Yet investors may 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 these specific spending packages should not alter your long-term investment strategy in any sizable way. However, it may open to the door to specific investment opportunities. 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.

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