Capitalizing on America's Likely Infrastructure Improvements

Includes: BDRBF, CBI, CX, MIC
by: Umar Saeed

The recent news has been dominated by discussions about deficit and debt reduction. Don't overlook the fact that the Federal government still has every intention to spend in targeted areas of its economy in order to create growth and reduce unemployment. In particular, the 2012 budget proposal has $556 billion dollars to be spent over six years on building the nation’s surface infrastructure.

While some experts believe America is already in recovery, the United States Federal Reserve's actions indicate that is not the case. They have made it clear that quantitative easing is here to stay indefinitely. Despite receiving a “negative” outlook from Moody’s, US treasury notes are still as valuable as ever and by all accounts are considered safe. Unlike other nations around the world experiencing sovereign debt problems, America has much more leeway to get its fiscal situation in order.

The advantage of being the world’s reserve currency (“exorbitant privilege”) is that American treasury notes are still in great demand, a product of worldwide economic uncertainty. Low bond yields allow America to borrow at a low rate, and provided it can invest in projects with high chances of growth, such expenditures will actually improve its fiscal situation over the next decade as long as the growth outweighs the costs of borrowing. American infrastructure is that sure fire bet. It will stimulate economic growth and reduce unemployment, especially among unskilled workers.

Consider this excerpt from The Economist that reveals some intriguing statistics about America’s unemployment situation, and why it is proving to be a difficult task to reduce this number:

The decline of the working American man has been most marked among the less educated and blacks. If you adjust official data to include men in prison or the armed forces (who are left out of the raw numbers), around 35% of 25- to 54-year-old men with no high-school diploma have no job, up from around 10% in the 1960s. Of those who finished high school but did not go to college, the fraction without work has climbed from below 5% in the 1960s to almost 25% (see chart 2). Among blacks, more than 30% overall and almost 70% of high-school dropouts have no job.

These figures are likely to improve as the economic recovery continues, but probably not by much. The pattern of the past four decades suggests a ratchet effect: the share of poorly educated men in work falls in recessions and fails to recover fully in subsequent expansions. The effect could be especially strong this time.

One reason for this is that less-educated men are disproportionately likely to work on building sites and in factories, where lots of jobs were lost in 2008-09. Another is that the recession fell heavily on poorly educated young people. Teenage employment rates slumped to the lowest on record. Those who enter adulthood without a job or a college place are much less likely to work when they are older. Larry Summers, Barack Obama’s former chief economic adviser, worries that even when “full employment” returns later this decade, on recent trends around 15% of all men, 20% of men who have not been to college, 35% of those who did not finish high school and more than 60% of black male high-school dropouts will probably not be working.

Widespread male worklessness has huge economic, fiscal and social costs. It reduces America’s economic potential. It deepens its budgetary hole, because less tax is raised and more is spent on those out of work. The fraction of prime-age men on disability benefits, for instance, has more than tripled from 1.5% in 1970 to 4.9%. Federal spending on such benefits amounts to $120 billion a year, almost 1% of GDP.

The case for spending on infrastructure becomes more appealing when the benefits of enhanced mobility are accounted for. Simply put, moving people and goods around faster increases overall productivity. Transportation is growth in and of itself, but it also acts as a public good that allows people and corporations more time and money to be more productive in their own ventures.

For President Obama, there is no better way to spend government money than on improving the nation’s infrastructure. It creates growth that will outpace the cost of borrowing and creates a demand for unskilled labor, addressing structural unemployment that will otherwise persist. Infrastructure investment highlights an area of growth as the US economy struggles to find answers.

There is no doubt that the $556 billion proposed spending on transportation will be challenged by the GOP every step of the way in the name of fiscal responsibility. However, it will be quite clear by the end of 2011 that economic recovery has not taken hold in America, which will justify political pressure to include such measures in future budgets.

In the meantime, it would be prudent to prepare for the budget to pass with a significant amount spent on infrastructure. Reliable options for growth over the next five years and beyond are the Chicago Bridge & Iron Company (NYSE:CBI), Bombardier Inc (OTCQX:BDRBF), Cemex (NYSE:CX) and Macquarie Infrastructure Company (NYSE:MIC).

This small group of stocks provides investors coverage in rails, bridges, planes as well as the raw materials involved to build them. These companies are large and have operations around the world. As there is a risk that specific timing of massive American infrastructure projects cannot be predicted, their diverse operations entails they benefit from overall global infrastructure development as well.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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