US Infrastructure Bill and Its Impact on the Construction Industry
- In November 2021, the U.S. Congress approved a $1.2 trillion infrastructure bill.
- It is expected to help in fixing the country’s inflation and supply chain troubles.
- Though the bill allows greater transparency in contracting decisions, it could lead to higher prices for construction materials.
After months of negotiations, the U.S. Congress approved the Infrastructure Investment and Jobs Act in November 2021. This bill carries a price tag of $1.2 trillion, which includes $550 billion for transportation, broadband and utilities; $110 billion for roads, bridges and other major infrastructure projects; and $40 billion for repair and replacement of bridges. The legislation also allocates more than $65 billion for power infrastructure, including $29 billion for the electricity grid.
The infrastructure bill is expected to help alleviate U.S. inflation and supply chain concerns. It aims to expand domestic preference procurement policies for public work infrastructure, enhance the domestic content requirement of construction materials sold to the federal government under the Buy America Act and allow for greater transparency in governmental contracting decisions. It also aims to meet the goal of decarbonizing the power sector by 2035.
A boon for the U.S. construction industry
The bill provides federal investments in a wide range of infrastructure projects and is expected to help generate new demand for construction services, equipment and materials. As a result, construction spending is expected to increase 5% in 2022 and 5.5% in 2023. Moreover, these investments are expected to create high-paying career prospects in construction and make the economy more efficient and competitive.
Impact of the infrastructure bill on raw materials
Cement is one of the major components in the construction industry and one of the single biggest beneficiaries of the infrastructure bill. With the U.S. cement industry at 90% production capacity with 30% of import capacity, prices are expected to increase. As there is a lack of substitutes available for cement, it is a highly inelastic product. Even a 15%-20% increase in prices can double the cement sector’s earnings over the next 5 years.
Construction is one of the largest end markets for finished steel products in the United States. It accounted for nearly 44% of annual domestic steel shipments. According to research by Morgan Stanley, every $1 billion spent on infrastructure is approximately equal to 50 kilotons of steel demand. Proportionately, a $1 trillion/10-year infrastructure plan would be equal to 50 million tons of steel demand over 10 years, depending on the type of projects included in the infrastructure package.
Downstream benefits for associated industries
As the economy recovers from the COVID-19 slump, many companies associated with the construction industry are likely to see increased profits over the next few years. The bill is not only expected to boost building materials manufacturers’ toplines but also have an effect across the entire downstream supply chain, such as heavy equipment manufacturers, electrical systems suppliers, automation solutions providers, semiconductor fabrication equipment companies, etc.
The multiplier effects of government spending
The increased infrastructure investment is expected to provide long-term tailwinds for the U.S. economy and in turn the construction industry. Current estimates indicate that each dollar of infrastructure spending increases gross output by two dollars.
The new federal infrastructure spending is expected to have less of a crowding-out effect. The bill requires the “Buy American” policy to use materials produced in America. Construction materials that are usually imported are expected to be less impacted by the increased federal buying.
However, contractors who have been procuring their materials domestically will face higher prices. As a result, companies that are looking to use the same labor and materials as federal infrastructure projects must take action to get firm bids before costs rise.