The market has been on a strong run for the majority of 2021. With the exception of a pullback in September, followed by a strong October, the general direction has been upward. Now, the U.S. Congress has passed a $1.2 trillion infrastructure bill that was signed into law by President Biden yesterday. What’s in the Infrastructure bill and what does it mean for our country and the markets going forward? There are some confusing talking points floating around out in the media-sphere, so I’m hoping to illustrate and explain as much as I can in today’s Financially Speaking. As always, the team at Barron Financial Group are only a phone call or email away if you have further questions or prefer a personal discussion.
The 2021 Infrastructure Bill
First passed by the U.S. Senate on August 10, 2021, the Infrastructure bill has languished in the U.S. House of Representatives until it was passed on November 5, 2021. Why did it languish? Well, House Democrats, led by the progressive wing and advocated by the “squad” and its supporters, wanted to tie the much larger social spending bill (a.k.a. reconciliation bill) promoted by President Biden and not vote on infrastructure until the social spending bill passed. The underlying logic being that once the infrastructure bill has passed the progressive wing will lose its leverage to get votes on the social spending bill. In the end, of the 30 representatives that were hesitant to vote for infrastructure, House Speaker Pelosi worked all but six of them into approving the bill. Only the six, formal “squad” representatives voted “no”.
The first point of clarity I want to make is that the size of the bill itself is somewhat misleading. Yes, the total spending is $1.2 trillion, but of that only $550 billion is new spending. Meaning the remaining $650 billion was spending already approved for infrastructure related projects. This includes items such as the Highway Trust, Drinking and Clean Water funds and the FAST act (Fix America’s Surface Transportation), signed into law in 2015 by President Obama. I think it is important to remember that the U.S. has a means for addressing and investing in its infrastructure every year regardless of new bills that get this much attention. Although, some might argue that annual spending is insufficient and is why we need additional spending approvals.
Now, as we look more closely at the $550 billion in new spending, the scope of the bill becomes clearer. Here’s the breakdown:
|· Roads & Bridges = $110 billion||· Railroads = $66 billion|
|· Power Grid = $65 billion||· Broadband = $65 billion|
|· Water = $55 billion||· Cyber & Climate = $47 billion|
|· Public Transit = $39 billion||· Airports = $25 billion|
|· Environment = $21 billion||· Ports = $17 billion|
This, in my opinion, is a fairly impressive list of targeted area spending. This is a long-term project with spending not expected to start for many months and to last at least five to ten years. No doubt, there is some graft and pet-projects included, and I’m sure plenty of areas for push-back from partisan groups. For example, the $110 billion for roads and bridges includes spending for Puerto Rico’s highways, the $65 billion for the power grid includes clean energy spending (some might suggest this is non-infrastructure “climate” spending). The $65 billion for broadband includes funding to reduce Internet bills for lower-income citizens, the $21 billion for the environment is all about cleaning up brownfield sites, abandoned mines and old oil & gas wells. Again, some might argue this isn’t traditional infrastructure. Let’s take a look at some of the more common push-back we’re seeing.
The big one is the idea that only 25% of the $1.2 trillion is to be spent on traditional infrastructure. I’m going to challenge this on a couple of fronts. First, with $650 billion of the spending already pre-approved as part of other, in-place infrastructure measures mentioned above, that equates to about 54% of the total bill. That’s already more than the 25% claim. Second, we don’t yet have a detailed list of specific projects that this bill will fund, so the 25% claim requires us to make greater assumptions. For example, the entire $21 billion for environment would be considered part of the 75% non-infrastructure spending as would whatever amount is spent for low-income aid from the $65 billion for broadband. Lastly, some say that the bill is too accommodating to unions, which raises the overall cost of projects. OK, I see these points, but is cleaning up an old oil well or brownfield site really that bad? Should we not try to help lower income citizens get broadband Internet? Are we better off not doing a project rather than having it done by higher paid union members? Could the price tag be lower without some of this spending, of course, but is that enough to suggest the bill is not good and we are better off without it?
I think of Dwight Eisenhower and his support for the 1956 Federal Highway Act. That bill, after approval, ended up building 41,000 miles of highway, and linking our country in a way it never was. Was there graft and pet projects in that bill…I’m fairly certain there was, but does that diminish the overwhelmingly positive results achieved? I would say no.
What Might the Repercussions Be?
Anytime a large spending bill like this is passed, there are guesses about how it might affect the country going forward. In this case, there is good reason to believe we will see a surge in labor hiring. Certainly, at the specific construction level, but also within the Federal government to help handle and oversee the law’s implantation. That hiring will be spread over time and may not be easily identified in any given labor report. For the investment markets, the idea of more hiring, and people having more disposable income would be supportive to stocks. Further, a clear sign of infrastructure improvement that provides for more durable, and efficient, business and personal transactions will also be supportive to stocks. On the flip side, if this law proves to be more graft than substance, the lack of infrastructure progress along with the greater level of national debt will be seen as a general downer for both the labor and stock markets.
I think today’s pundits are all too willing to take something with mostly good intentions, supported by both political parties, and dismantle it for smaller, very specific, concerns. My general feeling is that infrastructure in the U.S. has decayed over the last 25 years and has been talked about for at least the last three Presidential cycles. This bill will help fix at least some of that decay. While I may not always be a huge President Biden fan, I give him credit for seeing this one through.
Barron Financial Group, LLP is a fee-only Registered Investment Advisor regulated by the Connecticut Department of Banking.
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