Infrastructure Lag
In some parts of the nation there is a seasonal aspect to the construction cycle. This fact makes it even more frustrating that more progress has not been made on the infrastructure bill. If the funds will not flow this year in the later Summer to Fall, some project starts will be delayed into next year. It is true that heaters can be brought out to cure concrete, but the energy costs just serve to push the project costs higher.
In the meantime, municipal issuers are doing their part to move projects along. Issuance is trending higher of late even if it is not considered an offset to the redemptions and the strong demand that we are experiencing in the municipal bond market currently.
I have become aware that on the taxable side there is a fair amount of activity regarding infrastructure. Some infrastructure funds have been established or have been expanded from the funding perspective of late. Taxable rates remain quite low so it is very probable that activity will be positive in the near term.
Who does not appreciate the value of a bipartisan effort on increasing the flow of funds to infrastructure? The recent bipartisan proposal of a reported $1.2 trillion on a narrower definition of infrastructure is certainly a positive development. The President had to take a pause on infrastructure to allow for time to defend freedom abroad. Reports indicate that he is inclined to work with the bipartisan group to move the effort along.
The broader goals that were put forth in the first version would need to be addressed in subsequent legislation. This approach still appears to have a relatively low probability of failure given the rule of 51.
How to pay for the proposal continues to be the main impediment to progress. In the market we have talked about indexing the gas tax for ages. It appears that the time has arrived to permit the adoption of such a feature given our legislature would approve. As for other taxes it is far from clear which ones would pass muster. Out of the broad-based taxes, the move back to 39.6% on personal income and an increase to 25% on the corporate tax should be easier to gain momentum. I have many more qualifications about raising the capital gains tax to levels we have not seen in modern times. My concern about the later is that it could turn out to be a jobs killer.
As for applying unused stimulus funds in support of the infrastructure program, I am not as sanguine. There still may need to be draws on those funds for the intended purposes. However, I would give some flexibility to states and localities who would be able to garner approval from their legislative bodies to do so.
Can we all just be adults about this process? We fully appreciate the fact that for a quality infrastructure program we will need to have attainable and reliable revenue sources backing the programs. Unfortunately, politics continues to be the stumbling block.
With extended unemployment benefits running out in September, an infrastructure program would put many able-bodied workers back on the job at relatively good wages. This program could turn out to be one of the greatest job creators of all.
The Fed has continued to stress that we are still not where we need to be on employment. Given the recent Fed meeting commentary, we see a shorter path to tapering than before. At the same time, the Fed does not appear to be eager to raise rates now. The market has commenced driving rates higher on its own.
Clearly, it behooves us to approve a major infrastructure program while rates remain quite low historically. Or should we dilly dally until rates are 100 basis points higher? You be the judge. Timing is of the essence here.
John Hallacy
John Hallacy Consulting LLC
Recent Comments