Despite the US economy being the world leader in many respects, the same can’t be said for the quality of its infrastructure. You only have to touch down in Los Angeles Airport to realise the third world nature of some US infrastructure. This is in stark contrast to the magnificent infrastructure you encounter when arriving in China, modern airports, wide boulevards and state of the art buildings. This is also the situation in remote Chinese cities.
Why is US infrastructure in need of repair?
Very simply it is very old. Many highways, airports, bridges and ports were built in the decade after World War II. Since then, the US Government has under invested in infrastructure. A recent report by “think tank” the Center on Budget & Policy Priorities highlighted that infrastructure spending by US state and local governments has fallen to a 30 year low (see chart below). In addition, federal spending on infrastructure is also falling and this lack of spending is having a detrimental impact on economic growth.
This under investment in infrastructure was reflected in the American Society of Civil Engineers (“ASCE”) 2013 report card (see table below) on the state of US infrastructure, which awarded the US an underwhelming D+. The ASCE should know about infrastructure as its membership includes 140,000 plus civil engineers. There was a glimmer of hope in the 2013 report as the overall grade was slightly higher than the D awarded in 2009. The ASCE cited “dilapidated roadways, insufficient waterways and a pressing need for modernisation.” The extent of the required investment amazed me; approximately $3.6 trillion would be needed by 2025 to fix the run-down infrastructure. We await with interest the release of 2017 report card on the 9th of March.
US Infrastructure report card
Can President Trump save the day?
But all is not lost; President Trump is promising infrastructure spending of US$ 1 trillion over 10 years. In a campaign speech, the President stated “we are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools and hospitals. We’re going to rebuild our infrastructure which will become second to none.” In addition, the President is determined to build a wall on the Mexican border, but not just any wall, in President Trump’s words a wall that is “impenetrable, physical, tall, powerful, beautiful, Southern border wall”. We are prepared to give President Trump the benefit of the doubt, as there is one thing President Trump knows plenty about and that is building things!
We think President Trump’s proposal will gain traction in Congress as an increase in infrastructure spending has bipartisan support with Democrat House minority leader interesting in working with Trump “to pass a bill very fast”.
Conclusion
The timing of President Trump’s infrastructure policies is uncertain, as it will take time to make its way through Congress. Despite the potential for delay, our recent conversations with US building materials companies confirmed that demand is robust anyway, boosted by the recovering US housing market, low interest rates and increased business confidence.
The Milford Global Fund has exposure to a number of companies that benefit from an increase in infrastructure spending. We particularly like US building materials companies, paint manufacturers and railroads, as these sectors have strong tailwinds.
As the US’s largest aggregates producer mentioned to us recently “the cake tastes pretty good at the moment and a big infrastructure plan would be icing on the cake”.
It’s hard to Trump that comment!
Stephen Johnston
Co-Portfolio Manager
Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.