C.J. Lawrence Weekly – Uptick in Infrastructure Spending Looms

It’s difficult to handicap which spending bills will be approved in the U.S. Congress in the coming months, especially given the toxic political environment in Washington, D.C.  But one bipartisan issue that tops most agendas is the nation’s crumbling infrastructure and the need for an infrastructure spending program.   Since 1980 the American Society of Civil Engineers (ASCE) has generated a report card every four years that grades the state of U.S. infrastructure.  The last report card, filed in 2017, gave the nation’s infrastructure a grade of “D,” meaning that conditions are “mostly below standard,” or are exhibiting “significant deterioration,” with a “strong risk of failure.”   The group estimates that there is a total infrastructure spending gap of nearly $1.5 trillion needed to be filled by 2025.  The average age of government fixed assets has now risen to a record high 24.8 years, as successive governments have kicked the can down the road.  Private infrastructure spending has not held up its end either.  While capital spending among S&P 500 companies grew 15.7% in 2018, growth slowed to 4.5% in 2019, and is expected to be up only 1.4% in 2020 according to analysts surveyed by FactSet. 

Average Age of U.S. Government Fixed Assets | Source: Bureau of Economic Analysis

Previous attempts at crafting and passing infrastructure legislation have been weighed down by pork projects and amendments.  Further complicating the infrastructure spending rubric is the challenge of matching federal initiatives with state and local initiatives.  According to the Congressional Budget Office, only 25% of U.S. public infrastructure funding comes from the federal government.  That is down from a peak of 38% in 1977, leaving often cash-strapped local governments to bear more of the costs of investment and maintenance.  But persistently low interest rates may be encouraging municipal treasurers to make hay while the sun is shining and address critical infrastructure needs.  A survey of municipal finance underwriters conducted by Bloomberg suggests that municipal bond issuance will surge to a record in 2020, after rising 24% in 2019. 

Average Age of U.S. Private Fixed Assets | Source: Bureau of Economic Analysis

Investors who bought into the infrastructure theme previously have been disappointed.  Despite the growing need for infrastructure investment, most related stocks have lagged the broader indices.  The S&P Materials Sector, which represents chemicals, composite, aggregates, and metals and mining companies, likely beneficiaries in an infrastructure spending spree, lags the S&P 500 by over 10% year-to-date.  But the current state may be reaching an inflection point whereby public projects can no longer be delayed and private infrastructure investments are necessary for companies to compete.  Recent progress in U.S. – China trade talks may also give private infrastructure managers more impetus to move forward with capital projects.  A federal program, should it materialize, aligned with increased state and local spending, that runs concurrent with an uptick in private fixed asset spending would be the trifecta that infrastructure investors have been seeking.  Odds are increasing that theirs could be a winning strategy in 2020.      

S&P Materials Sector Relative to S&P 500 | Source: FactSet

Terry Gardner Jr. is Portfolio Strategist and Investment Advisor at C.J. Lawrence. Contact him at tgardner@cjlawrence.com or by telephone at 212-888-6403.

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