President Biden has announced his $2.2 trillion American Jobs Plan (AJP) which the administration is promoting as an 'infrastructure bill'. While it does contain a healthy dose of needed infrastructure spending, it also includes billions for items such as incentives to purchase electric vehicles (EV) which go beyond any definition of infrastructure. It would be more accurately described as an 'investment bill'.

The most widely recognized infrastructure needs assessment comes from the American Society of Civil Engineers (ASCE). As such, it makes sense to use their definition of infrastructure: transportation (aviation, roads & bridges, ports & inland waterways, rail & public transit), broadband communications, power & energy, public health management (solid waste, hazardous waste, sewer & stormwater, drinking water) and conservation and development (dams, levees, public parks). The ASCE also includes schools. In their 2021 Report Card for America's Infrastructure, they peg the infrastructure funding gap at $2.6 trillion by 2029, given current and projected needs and funding commitments. Not that closing this gap would take their report card grade to a 'B'; it reflects the difficulty in achieving everything.

Using the ASCE framework, roughly $900 billion of the $2.3 trillion would be considered infrastructure. It's also important to note that the construction sector will be impacted differentially from infrastructure. Some infrastructure spending does not result in construction activity - for example, modernizing public transit includes the purchase of buses and rail cars. However, there are also investment dollars that would not be considered infrastructure, but which will result in construction activity, for example, much of the $213 billion allocated to affordable housing. It is very difficult to assess the construction market impact from the level of detail currently provided. It is important to note that the documents that have been published are policy statements, not legislation. However, based on a rough assessment of the goals released, we believe that around $1.1 trillion, or nearly half the package, would accrue to the construction industry.

The breakdown

The transportation component of the package accounts for $621 billion of AJP spending. The largest element in the transportation component is EV at $174 billion, yet only the charging network, a relatively small component, would be considered infrastructure and offer an opportunity to the construction sector. Some of the additional provisions include $115 billion for road and bridge repair, $85 billion for public transit modernization, and $80 billion for passenger and freight rail.

Other key provisions include investments in a mix of infrastructure and residential, commercial, and institutional structures that will create opportunities for the construction sector. These include $100 billion each for broadband, power infrastructure, and public school modernization and $213 for affordable housing.

Finally, a third set of provisions include investments that could improve economic efficiency and competitiveness but offer relatively few construction opportunities. Some highlights of this set include $400 billion for essential home care workers, $100 billion for workforce development, and $300 billion for supply chain and manufacturing. (See our breakdown provisions)

Timing

The spending occurs over 8 years. Speaker Pelosi has set July 4 as a target date for the legislation to pass the House, but it would also need to clear the Senate. There is potential for the bill to pass after Congress' August recess, but it could extend until fall. Even then, projects will need to be planned and permitted. Any appreciable impact to construction markets would not be felt until 2022.

The timing creates a further complicating factor. It appears that this spending supplements the FAST Act, aka the 'Highway Bill', which expires at the end of September. There are indications that the Biden administration intends to renew that program in the fall as well, perhaps making changes to create less dependence upon the gas tax. For comparison purposes, the FAST Act of 2015 authorized $305 billion over 5 years, which suggests an average annual spend of $61 billion. If one removes the EV component of the transportation segment of the AJP, the result is $55.9 billion of annual average spend. While the AJP is an ambitious policy prescription, its impact on transportation infrastructure is actually less than that of the Highway Bill. Both measures together, however, would create expanded opportunities for contractors, construction material suppliers and equipment producers, and rental companies.

What it means for the industry

Of course, the $1.1 trillion in estimated construction spend translates to $137.5 billion per year. While it's not strictly apples and apples, the Value of Construction Put in Place for 2020 was $1.36 trillion. While much remains to be ironed out in the details, the AJP has the potential to add 10% to the construction market in the coming years.

To put the scale of this plan in the context of President Obama's American Recovery and Reinvestment Act (ARRA) of 2009, that stimulus package, which was intended to reverse the Great Financial Recession of 2008, was $831 billion over 10 years. The transportation infrastructure element was $51.2 billion, or only $5.1 billion per year, about 1/10 the size of the AJP. Interestingly, there was $7.2 billion for public broadband even then, $8.2 billion for affordable housing, and $38.8 billion for various energy-related projects. One of the criticisms leveled against the AJP is the relatively small impact that the ARRA had on the economy in 2009. As this comparison indicates, the AJP is a significantly more potent prescription.

Indeed, it is fair to ask whether the economy can even absorb all this spending. The AJP comes on top of the recently enacted American Rescue Plan, which provides $350 billion in unrestricted aid to state and local governments. While state and local governments have many needs, some of this money could find its way to infrastructure in the short term. While the construction market, and particularly residential construction, were Ground Zero of the Great Financial Recession, construction was among the lighter impacted sectors of the pandemic-induced recession. Residential construction was only seriously affected in 2020Q2 and is already on the mend. The February architectural billings index data from the American Institute of Architects moved into positive territory for the first time since the beginning of the pandemic, which suggests that non-residential structural construction put-in-place could improve in 2022. With the supply of skilled workers likely to be tight by 2022, there may be constraints on how fast this spending can be implemented, especially in the hot housing market.

The Biden administration proposes to pay for the AJP spending over 15 years via a miscellany of corporate tax increases. While the headline feature is an increase in the corporate tax rate from 21% to 28%, there will also be a tax increase on corporate foreign-sourced income and a 15% minimum tax on large corporations who may currently pay low or even no taxes. There will also be the elimination of certain tax incentives and regulations to prevent corporate inversions. Since the spending occurs over 8 years, while the tax increases occur over 15, the net impact to the overall economy is mildly stimulative. There will be significant winners and losers within specific sectors, however.

The political calculus of the AJP is complicated by its size, scope, and the taxation to pay for it. Republicans are largely skeptical of the entire package, but even some Democrats are concerned about corporate tax increases, and not even spending items will be equally popular. One should expect changes to the plan as it evolves into legislation that can get enough votes to pass. In the meantime, managers and executives should be closely examining the elements most applicable to them in order to make informed suggestions to your elected representatives. IHS Markit will be continually updating our perspective as this initiative moves through Congress.

Posted 12 April 2021 by Scott Hazelton, Director, Construction, S&P Global Market Intelligence