The investment bill should show its beneficial impact from late 2022 to into 2023, if passed in 2021, affecting a long downstream supply chain, renovating an aging public works system, and increasing productivity
The successful passage of the USD 1.2 trillion bipartisan infrastructure investment bill by the United States Senate has boosted prospects for the construction industry in the country which remains cautious amidst surging building materials prices and short supply. Analysts observe that the investment bill should show its benefits from late 2022 to 2023 if passed in 2021, as there is typically a lengthy process for infrastructure projects to be designed, approved, and bid out before work can begin.
U.S. buildings material suppliers are expected to see a robust and sustained rise in demand, especially for aggregates, cement, asphalt, and ready-mix products, as a consequence of the proposed investment of USD 110 billion to modernize roads and bridges. They may also benefit from major works connected to investments of USD 73 billion in power grid improvements, USD 66 billion for railways, and USD 25 billion for airports.
In addition to the bipartisan infrastructure proposal, the Senate is also advancing with a USD 304 billion surface transportation reauthorization bill, which will also likely result in a positive outlook for U.S. building materials suppliers including major companies as Vulcan Materials and Martin Marietta.
An average of 45 percent of Vulcan’s aggregates shipments over the past five years went to publicly-funded construction works, while the public infrastructure market accounted for 38 percent of Martin Marietta’s annual average aggregates shipments over the past five years.
“[I]n any definition of infrastructure, if it’s new construction, aggregates [are] going to be in the foundation. So, it’ll help us whether it’s roads and bridges or other forms of infrastructure,” said J. Thomas Hill, president, and CEO of Vulcan Materials in a conference call with investors.
Many companies tied to the construction sector are already projected to collect profits over the next couple of years as the economy recovers from the Covid-19 slump. Spending measures will help secure and boost growth through contracts for new projects and orders for supplies and equipment.
But the bill is likely to boost not only the building materials manufacturers’ toplines, but also to have an impact across the entire downstream supply chain, including heavy equipment makers, electrical systems suppliers, automation solutions providers, and semiconductor fabrication equipment players.
The Association of Equipment Manufacturers (AEM), for instance, touted the plan with enthusiasm, releasing a note that recalled that the industry “has long called for a transformative investment in our nation’s physical infrastructure so they can continue to build, feed, and power the world, and are pleased to see such important progress,” stated the senior vice president of government and industry relations at AEM, Kip Eideberg.
Paint and coatings makers, including Sherwin-Williams and PPG Industries, are also in a good position to take advantage of any ramped-up government spending. Bridges need paint and other coatings to endure the elements, while roads and buildings also need a significant amount of paint.
Robust money for long-delayed needs
The infrastructure bill will pour money into long-delayed needs. Investment in improving infrastructure in the U.S. is long overdue, as the country’s roads, bridges, and other infrastructure have aged without any significant overhaul in decades, according to economists and business leaders.
According to the White House, one in five miles, or 173,000 total miles, of U.S. highways and major roads and 45,000 bridges are in poor condition. With the bill, the aging public works system would receive the most substantial government expenditure since 2009.
In its 2021 report, the American Society of Civil Engineers gave the country’s roads a poor grade, saying over 40 percent of the system is now in poor or mediocre condition.
Source: Infrastructure report card from the American Society of Civil Engineer
In addition, about 42 percent of all bridges in the country are at least 50 years old, and 7.5 percent are considered structurally deficient.
From an economic perspective, as the U.S. economy relies heavily on infrastructure through transportation, power grids, ports, roads, and bridges, delays in these upgrades are posing challenges to its GDP growth. The proposed infrastructure deal is poised to boost productivity and drive economic growth over the coming decades.
The economist at the investment firm Evercore ISI Peter Williams projects that, in 2025 and 2026, the extra package would add one percentage point to the economy’s growth rate.
Economic push amidst surging building materials prices
The bill advances amidst surging building materials prices, which have been on the rise since the beginning of 2021 in the United States, due to robust demand from the housing sector, the economic rebound as vaccination advances, and tight supplies.
According to the Associated General Contractors of America, unprecedented price increases for a wide range of goods and services used in construction increased contractors’ costs by 26.3 percent from June 2020 to June 2021.
Source: U.S. Bureau of Labor Statistics
Steel and lumber have hit record prices during the first and second quarters before losing momentum at the beginning of the second half of the year. Demand is still strong despite much more moderate lumber prices in North America.
The producer price index for lumber and plywood doubled from June 2020 to June 2021, although lumber prices have declined since the index was recorded. The index for steel mill products climbed 87.5 percent, while the index for copper and brass mill shapes rose 61.5 percent and the index for aluminum mill shapes increased 33.2 percent.
Expensive building materials and shortages of labor and land may pose additional challenges for the industry growth this year. On the demand side, low mortgage rates and a desire for more spacious accommodations during Covid-19 as work-from-home has become a mainstay of work culture may push further growth to the sector.
Support to the construction sector
The bill is long waited by public contractors, as spending on public construction projects has seen decreases month after month this year.
Since the start of 2021, spending on public construction has only seen a positive number in January, when it rose 1.7 percent compared to December 2020. From February onwards, all figures have been recorded on the red. Monthly, it decreased by 1.6 percent in February, declining further by 1.5 percent in March and then by 0.6 percent in April. In May and June, public spending continued to decline, down by 0.8 percent and by 1.2 percent, respectively.
Source: U.S. Census Bureau
Meanwhile, since the beginning of 2021, as Covid-19 eased and vaccination rollout advanced in the U.S., the country’s housing sector has seen a surge in demand hitting multi-years highs month after month, boosted by ultra-low mortgage rates that now hover around 3 percent, raising concerns of a new housing price bubble.
In the second quarter of the year, mortgage loans reached USD 1.2 trillion, exceeding volumes seen in the previous three quarters and well above the USD 752 billion level reached in the final quarter of 2019, according to the New York branch of the Federal Reserve.
The Mortgage Bankers Association Builder Application Survey reported that mortgage applications for new home purchases fell 23.8 percent in June year-on-year and by 3 percent compared to May as a consequence of materials prices, high demand, and low inventories which led to double-digit growth in the median house price.
In the non-residential sector, the market is far behind. The Associated General Contractors of America, when releasing its analysis on June construction spending data, noted that non-residential declines include a steep drop in spending on highway and street projects. The association urged Congress to quickly pass a new, bipartisan infrastructure measure.
“The pandemic has created a tale of two construction industries, a residential market where demand continues to surge and a non-residential market that is struggling to gain traction. The federal government has a real opportunity to boost non-residential construction by passing the bipartisan infrastructure measure as quickly as possible,” said Stephen E. Sandherr, the association’s chief executive officer.
Non-residential construction spending to decline this year
While pent-up demand from the pandemic is helping to improve the outlook for construction, non-residential construction spending is expected only to be strengthened by 2022, according to a report from the American Institute of Architects (AIA). This figure is likely to be aided by the infrastructure bill.
After declining by about 2 percent last year, the AIA Consensus Construction Forecast Panel, in its July update, projected that non-residential construction spending will decline further by 3.9 percent this year, which is an improvement from the forecasted 5.7 percent decline reported in January. Meanwhile, non-residential construction spending is expected to increase 4.6 percent in 2022.
Ratings agency Fitch forecasts public construction and private non-residential expenditures to decline 5 percent and 15 percent, respectively in 2021. Highway and street spending are likely to grow modestly this year, while housing starts will increase, driven by single-family housing starts.
As the public construction sector tries to pick up speed and accelerate growth, the infrastructure bill is only expected to add momentum to this sector over the long term as the bill’s impact is likely to last for decades. Inflation poses a major risk to this package, while productivity and GDP growth may offset this barrier. It is a long-waited investment that is set to dynamize not only the construction sector and to bring its growth on level terms with that of the housing sector, but also the country’s growth as a whole.