On November 15, President Biden signed the bipartisan, roughly $1 trillion infrastructure bill into law. This level of infrastructure spending marks the largest federal investment in infrastructure in over 10 years, and largely focuses on traditional forms of infrastructure: roads, bridges, power grids, etc.
Plenty of politics came into play for getting this law passed – I will not cover them here. But now that the bill has become law, investors can set aside political implications and focus on pure policy, specifically how the new spending might affect the economy and markets.1
First, let’s dig into what’s in the infrastructure bill, which ultimately amounts to an additional $550 billion above projected federal spending on roads, bridges, expanded broadband access, and more. Here’s a roundup of the new spending:
- $110 billion for roads, bridges, and major projects
- $73 billion to update and expand the power grid
- $66 billion for rail maintenance, modernization, and expansion – most of this money will go to Amtrak
- $65 billion to broadband infrastructure and development
- $55 billion to clean drinking water
- $50 billion to bolster the U.S.’s infrastructure against climate change and cyberattacks
- $42 billion for ports and airports
- $39 billion to modernize public transport and make it more accessible (seniors, disabled)
- $21 billion for removing pollution from soil and groundwater
- $11 billion for highway safety and pedestrian programs
- $7.5 billion for a network of electric charging stations
- $7.5 billion on zero-emission or low-emission buses and ferries
In terms of economic impact, $1 trillion is approximately 5% of GDP – not a significant boost, but also not negligible. The key for measuring economic impact is understanding when the money will be spent and how it will be paid for.
Regarding the ‘when,’ this new spending will not happen all at once. States should see a major boost in core highway funding relatively soon, but money for most of the other projects could take months or perhaps even years, arguably minimizing the short-term economic impact.
Spending on modernization of public transit, for instance, will have to wait for Congress to pass a spending bill, which will likely come later in the year. $120 billion of the new funding comes in the form of competitive grants, which means the government will need to roll out grant programs and companies will need to bid for the jobs, like bridge replacements or new rail lines. The grant program and approval process could also take about a year. Incrementally higher spending over long periods will likely not create a material boost to GDP.
Regarding the ‘how’ the money will be raised, it will come from an assortment of revenue streams, but none of them include higher taxes – a plus for the economy. Some of the money has already been appropriated, including $200 billion in repurposed funds meant for Covid-19 relief. $50 billion will come from delaying a rule regarding Medicare rebates, and $50 billion more will come from states that did not use unemployment insurance supplemental funds. In short, no new taxes and no major near-term increases to the deficit should also mean relatively minimal economic impact.
As far as markets are concerned, a relatively muted economic impact likely translates to modest market impact, which I would argue is already priced into stocks. It has been widely known for some time now that the infrastructure bill would almost certainly pass, which means markets have already discounted its impact on earnings and growth, in my view. Investors should not expect some brisk tailwind now that the bill has been signed into law.
Bottom Line for Investors
In my view, the passage of the infrastructure bill is not a zero-impact event, but it is also not a major market mover that should drive the next leg of the bull market. I think it is perhaps best framed as a ‘modest tailwind’ for the economy and markets, with some sectors (Industrials, Materials, perhaps Utilities) faring better than others.
The real key takeaway for investors, in my view, centers around an idea I write about a lot in this space: how did reality compare to expectations? In the case of infrastructure, the bill started as a $2.3 trillion spending package that included tax increases to pay for it. Higher taxes and higher deficits could arguably be an issue for stocks, but the reality of the infrastructure law is that it is less than 50% of its original size with no tax increases and fairly modest new deficit spending – a reality better-than-expectations, in my view, which I see as a positive for markets.