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Will Fiscal Policy Make Markets Great Again? Part 3: Infrastructure Spending

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The Trump administration is planning to release a large infrastructure package as early as next month. Details have not yet been worked out, but the plan is reported to include $1 trillion in spending over a 10-year period, overhaul of regulations to move projects faster, and financing options such as public-private partnerships and tax credits.

The money would go towards transportation, energy, water supply and communications projects which are badly needed. The American Society of Civil Engineers (ASCE) publishes a report card on US infrastructure every four years and the 2017 report that was recently released came in with a D+ (just like in school, a D+ is not a good grade!) While our national grade is moving in the right direction (we have averaged a D- since 1998), there is still quite a bit of room for improvement. Alaska received a C-, so better than the national average but not exactly great either.

The main objective of this infrastructure spending would be to boost the capacity of the economy so that it can generate faster economic growth over the long run. These measures would certainly lift near term growth, but this is not the primary goal given the fact that we are near full employment at this stage in the business cycle.

Infrastructure improvements can increase the overall efficiency of the economy and lead to higher productivity levels. Long term economic growth is a combination of the number of people working and how productive they are. We already know the working age population is declining in most major economies and recent productivity levels have been weak compared to history. Building the capacity to boost productivity would help long term economic growth projections if the investments actually translate into better productivity. The key to success is correctly estimating the future demands of the economy so the money is allocated to the appropriate projects.

Details are sparse regarding the financing of this massive proposal, but the administration has expressed interest in exploring public-private partnerships and tax credits.  Another case where we will just have to wait for more details.

The $1 trillion in spending would be spread out over ten years. Therefore roughly $100 billion would be spent per year which amounts to about 0.6% of annual GDP. However, the International Monetary Fund (IMF) notes that if these funds are appropriately allocated, the payoff could be more substantial. IMF research concluded that the fiscal multiplier (the ratio of a change in national income to the change in government spending that causes it) is 1.4 over the medium term. Bloomberg utilizes this information to conclude that a reasonable expectation for net GDP growth when factoring in some monetary tightening is an increase of about 0.25% per year.

The need for infrastructure investment should help Democrats and Republicans find compromise. APCM analyst Kirsten Halpin notes that the market seems to be pricing in the likelihood of an infrastructure package. The Indxx US Infrastructure Development Index returned 13.1% the week of the election, while the S&P 500 returned 3.9%. Although we note that there are other factors that could have helped boost returns for companies in this index. For example, many large industrials are exporters, which as noted in the last post on tax reform would benefit from a BAT (border adjustment tax).

While much of the details are currently unknown, a large-scale infrastructure package would be beneficial to the overall economy and increase its ability to generate long-term sustainable growth. APCM’s investment committee will be monitoring how the developing fiscal policies, including infrastructure spending, impact the long-term outlook for economic growth and the financial markets. This outlook is the foundation for creating reasonable return and risk assumptions that help clients plan for the future. It’s important, so we will keep you posted!

Brandy Niclai, CFA®
Chief Investment Officer
Multi-Asset Strategies

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