Editors’ Note: MarketMinder is politically agnostic. We favor no political party nor any politician and assess developments for their potential market and economic impact only.
Late Friday evening, a rare celestial phenomenon occurred: The House of Representatives actually passed a bill of substance. Specifically, they passed the Senate’s nominally bipartisan infrastructure bill, with 13 Republican reps providing the votes to get it past the finish line as 6 progressive Democrats voted no. Pundits largely spent their weekend speculating on the legislation’s economic impact, touching on everything from the deficit to inflation to the potential winners and losers at both a state and industry level. In our view, a lot of it misses the big picture: This money trickles out over more than five years, and much of it may not get spent at all. We doubt this legislation moves the needle for stocks or the economy for good or ill.
Most headlines describe the bill as a $1 trillion infrastructure package, which is technically correct but also incomplete. While that is the total amount of federal funds the bill will deploy (provided the next Congress doesn’t change course), only about $550 billion of this is new spending—meaning, spending on top of what Congress had already penciled in. That $550 billion primarily features:
We imagine this will lead to some infrastructure improvements somewhere—a repaired bridge here, a more efficient freeway interchange there. But we don’t see much likely economic impact. Averaged out over 5 years, this $550 billion amounts to 0.5% of GDP.[i] It would increase the government’s component of GDP by less than 3% annually—tiny.[ii] We also doubt this amounts to a $110 billion annual net GDP increase. One, some of these initiatives could crowd out private investment. Broadband is one obvious example, as Internet providers would likely invest in 5G whether or not the government threw $65 billion worth of subsidies at them. We daresay electric vehicle charging stations are another.
Two, it will take much longer than five years to deploy this funding. Even in the parts of this bill that deal with traditional infrastructure, the prospects of this driving any sort of construction boom or big direct injection of federal money into communities seems low. We have always thought the notion of “shovel-ready” fiscal “stimulus” is a misnomer, as it ignores the complex permitting process required for any project of note. A road or bridge that spans multiple cities, counties or states needs approval from multiple agencies in multiple jurisdictions. There isn’t some huge backlog of projects that have permits but no funding—historically, it has been the opposite. That is a big reason why the American Recovery and Reinvestment Act of 2009—the last big “infrastructure” push—largely floundered. This also argues strongly against the bill fueling fast inflation from here.
Some proponents argue this bill will be more effective because instead of doling out all transportation funding to the states using the traditional formula, it instead creates grants that state and local officials will have to compete for. Maybe that greases the wheels a bit, but it doesn’t bypass the standard permitting process. It also seems like an epic case of government picking winners and losers, as the Transportation Department will pick the recipients. This risks politicizing the process, incentivizing local officials to pitch projects that align with the Transportation Secretary’s goals and preferences. As some coverage has noted, the current Transportation Secretary famously advocated for tearing down some freeways and bypasses in order to revitalize urban areas. This can be beneficial for local businesses—the re-routing of I-880 in Oakland after the Cypress Structure’s collapse comes to mind, as does the removal of San Francisco’s legendary unfinished Embarcadero Freeway. But if we end up with $110 billion worth of projects that make cities more walkable without offering benefits to suburban commuters or rural areas, has transportation improved? Or have local governments held back more productive investments in order to win over national politicians?
Next year’s midterms—and 2024—are another complicating factor. This projected spending will go back to Congress for approval each year courtesy of the budget resolution. If the House and Senate change hands next year, that could easily lead to the cancellation or redeployment of some of these initiatives. A new presidential administration in 2024, if we get one, could replace this initiative with its own, which a subsequent administration could later undo, and and and. We see a lot of potential for much of this money to get stuck in legislative and bureaucratic limbo.
Whether that is good or bad news will probably depend on your political leanings. But for stocks, it largely renders this bill a nonevent. So does the fact nothing here was a surprise—the Senate bill has been a known quantity for months. Stocks digested and moved on from it long ago. Materials stocks’ pop this morning, which many tied to the bill’s passage, looks like a sentiment-fueled overreaction. The bill’s impact on total global demand for metals is probably negligible.
Some have rightly noted that this bill is only part one of the administration’s spending agenda, and focus is now shifting to the $1.75 trillion Build Back Better bill, which passed a House procedural vote Friday night, too. Some coverage reports House Speaker Nancy Pelosi secured a verbal commitment from centrist Democrats to back the bill once the Congressional Budget Office scores it, claiming this ensures passage. Don’t be so sure. While some in Democratic leadership and the progressive caucus interpreted last week’s state election results as a call to pass the reconciliation bill, others’ comments suggest they see it as a call to pause. Those in swing districts will be watching closely, especially with redistricting coming down the pike. Even if it passes the House, the Senate is another matter, as Democratic leadership can no longer use the infrastructure bill as leverage over Joe Manchin and Kyrsten Sinema, the moderate Democratic holdouts. If anything, passing it probably drags the Senate process out that much longer—and the longer legislation drags, the more watered-down it tends to get.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.