US infrastructure to see huge investment

In many cities across the US, infrastructure assets are deteriorating and quickly approaching or already past their expected life spans, but a new era of US industrial production growth is materialising.

| 4 min read

The US Senate passed the Infrastructure Investment and Jobs Act (IIJA) in 2021, which allocates $1.2 trillion over 10 years with $550bn of new spending across a wide range of 21st-century infrastructure areas that could transform the US economy.

The IIJA is a huge step towards rebuilding US infrastructure. It aims to cover everything from water to power and roads to ports and has the potential to benefit US construction companies and building materials producers for years ahead.

Deglobalisation is gaining momentum, and developed economies want to strengthen their supply chains, and in August 2023, the White House issued final guidance on Build America, Buy America (BABA) regulations as part of the IIJA that is meant to boost the amount of domestically-sourced materials used for federally-funded infrastructure projects.

To qualify as ‘American made’ under BABA, a product must be manufactured in the US, with at least 55% of the cost of components fabricated domestically. The guidelines could represent a small additional tailwind for domestically focused material suppliers.

There are more than 43,000 bridges and 43% of roads across the US in poor condition and need of repair. The water infrastructure in the US was largely built in the last century and was designed to last roughly 75 years but is becoming more strained than ever as climate change raises seas levels and increases the frequency of intense weather conditions, putting further stress on the already aged infrastructure. Lead pipes were commonly used in water system across the US until they were outlawed in 1986 due to the danger of lead poisoning – but for many cities, these pipes remain.

Long-term plan

Clearly, infrastructure spending is not instantaneous and nor are its benefits. Only over time will spending translate to revenues, economic growth, and
social impact. Prior to construction, infrastructure projects must undergo extensive planning and review, which translates to revenues for consultants and infrastructure specialists. Spending then shifts to revenue for engineers, contractors and consultants before reaching
equipment or component manufacturers and producers of materials.

The Global X US Infrastructure Development UCITS ETF (an index tracking product) is one way to invest in some companies that could potentially benefit from the IIJA. The ETF invests in up to 100 US-listed companies which meet the index eligibility requirements within four core infrastructure sub-themes: Construction & Engineering Services, Raw Materials & Composites, Products & Equipment, and Industrial Transportation.

To be included in the index, companies must generate a significant proportion of revenues from the infrastructure subthemes and over 50% of revenues from the US. 74% of the companies are considered pure-play infrastructure companies with revenue exposure to the US around 78% of the ETF. The ETF would be sensitive to news regarding IIJA implementation, but more so on sentiment than the fundamental side.

There has previously been small adjustments to the bill and it is conceivable that more changes could occur if Republicans gain more influence in the 2024 elections. However, it would be politically dangerous and logistically impractical for the federal government to claw back spending authorised by the IIJA. The cyclicality of the construction industry and deterioration in broader macroeconomic conditions could lead to a slowdown in the space. However, federal spending and record backlogs means that the construction industry is unusually insulated against economic downturn. Importantly, demand for construction work in infrastructure, public works, and manufacturing is quite strong.

Labour issues

The current shortage of construction labour in the US prompts the question of who will fill the hundreds of thousands of jobs that the spending will create each year. Large-scale infrastructure projects require a chain of companies working together to ensure timely completion and labour shortages have the potential to cause delays, drive up costs, and result in projects being scaled back or scrapped.

The pipeline of new construction workers is not flowing as freely as it once did. The slow restart of training programs post Covid-19 and falling net migration means the industry is finding it difficult to attract the international workforce that is required.

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