Understanding Fiscal Measures and the Impact of the Inflation and Infrastructure Acts on Construction Volume
Let’s try to get a sense of the magnitude of these spending initiatives.
Fiscal measures have played a significant role throughout the pandemic cycle.
With talk of a recession looming, it is timely to look at the interplay of growth, fiscal, and monetary measures taken over the past 30 months.
Federal spending is predominantly income transfer mandates.
With Defense spending, over 25% of GDP is stable.
It would be better to say that the term spending only applies to discretionary outlays.
Non-defense discretionary spending of $900B (4% of GDP) is about equal to half the size of annual construction put in place.
The size of these transfers, plus increases such as Unemployment and Paycheck Protection transfers are known as Fiscal Impact Measures.
Fiscal boosts and drag have been significant throughout the pandemic cycle.
Headline Gross Domestic Product includes fiscal measures, getting a boost through 5 quarters of the pandemic, and now a drag.
Recently, Federal transfers alone lowered growth by 3.1 percentage points. A rise in federal and state tax collections and declines in real federal, state, and local purchases further contributed to the decline in fiscal impact, lowering GDP growth by 1.2 and 0.6 percentage points, respectively.
So, in total, fiscal policy reduced U.S. GDP growth by 4.9 percentage points at an annual rate in the second quarter of 2022. This caused GDP to fall at an annual rate of 0.6% in the second quarter, according to the government’s latest estimate.
Fiscal impacts turned negative in the second quarter of 2021 as fiscal support waned, and is expected to remain negative through the second quarter of 2024.
I would argue that it is not a real recession if the real GDP is not negative.
Reduced spending accompanied the pandemic through shut-downs of entire sectors of the economy. Savings increased through this period.
Now, the buildup of personal savings combined with negative real interest rates and short supply has caused the burst in inflation.
A similar effect was seen in asset prices, like our homes, or our investment portfolios.
Federal government deficits are really a code word for money creation. When the central bank buys a bond they create savings in federal accounts, also known as National Debt.
After increasing rapidly with the pandemic, total deficits are now decreasing over the short term and stabilizing over the medium term.
The Congressional Budget Office’s most recent projections show the cumulative deficit from 2021 through 2030 totals nearly $13 trillion.
Borrowing to finance that deficit—at a time when interest rates are expected to rise—would cause net interest payments as a percentage of GDP to increase over that period, from 1.4 percent to 2.2 percent. However, this is generally in line with the 50-year average of 2.0 percent.
Let’s ignore the explosion of net interest payments after 2030 for now. Long-term projections always portray fiscal doom through straight-line projections that never happen. We will come back to this.
The Infrastructure Act and Inflation Reduction Act will add about $120B (0.5% of GDP) annually to various discretionary non-defense budgets.
The Inflation Act contributes to fiscal drag due to a deficit reduction of $30B annually (0.13% of GDP).
It also intends to reduce prices directly through subsidies and price caps.
While the act is negative overall, about $500B will redirect into new spending categories including construction.
Similarly, new spending categories are created by the Infrastructure Act, $550B.
Sorry, more math…
Combined, both Acts could contribute to construction;
40B / 1,750B = 2.3% total increase to annual construction put in place, mostly in Non-Residential and Infrastructure over the next 8 to 10 years.
Macroeconomic budgets must run in deficit over the long term to support economic growth and positive inflation targets.
Let’s say we are targeting a 3% growth in Gross Domestic Product and a 2% increase in prices. That means long-term deficits of 5% of GDP are required to create the money supply for this expansion.
History shows that deficits were too small in the 30s, jumbo-sized for World War, too small again in the 50s, too large during 70s inflation, then counter-cyclical to the present.
This graph, of course, did not predict the countercyclical measures of the pandemic (note the 2019 forecast).