US elections and key issues for the construction industry

4 November 2020 (Last Updated November 4th, 2020 17:39)

US elections and key issues for the construction industry

As it remains unclear who won the presidential elections on 3 November with vote counting potentially taking a few more days to complete in main battleground states, including Pennsylvania and Michigan, GlobalData assesses the potential impact on the construction industry from a Biden or Trump victory.

During the election campaign, the construction industry had displayed mixed views on the prospects of a Biden administration with concerns about how it could affect the energy market and the overall sector in terms of tax and regulatory policies. During his term, President Donald Trump altered such policies in ways that favoured the fossil fuel industry and the housing market. For instance, Mr Biden’s proposals to increase corporate taxes and enact regulatory changes in the energy industry – including measures to reduce greenhouse gas emissions, end subsidies for fossil fuels, and invest in electric car infrastructure – have sparked market fears that his policies could sap broader demand for hydrocarbons.

Although the former vice-president has repeatedly vowed not to ban fracking, the production technique critical to the shale industry, he said that he would seek to limit new oil and gas drilling on federal-owned lands. He has also vowed to revoke the permit to build the US portion of the Keystone XL pipeline across the US-Canada border, which would reverse actions taken by Mr Trump, who, in 2017, signed an executive order, allowing it to go ahead.

But Mr Biden’s proposal to unleash a hefty fiscal spending package, including a vast infrastructure spending programme over his term, which could spark a rebound for the pandemic-stricken economy, has offset market fears that the expected regulatory changes and tax increases for corporations and high-income individuals would weigh on the economy and construction activity.

Getting the economy back on track (managing the pandemic and its fallout) will be the next administration’s foremost priority in 2021, given the magnitude that the current health crisis has had on the economy and the most fragile groups of the country who have been most hard hit by the crisis-induced unemployment. It is, therefore, likely that congressional leaders will pass another big fiscal stimulus package at the start of next year, regardless of which candidate ends up winning the presidential elections.

GlobalData also expects monetary policy to remain largely accommodative in the next two years amid the uncertain outlook and need to stabilise the economy and address the immediate economic issues tied to the pandemic. This has, nevertheless, increased concerns over widening deficits and growing federal debt.

If Joe Biden wins and the Democrats take control of the Senate, Mr Biden would most likely be able to pass all his policy proposals through congress. These include his plan to create a $2tr fund for clean energy and infrastructure to be deployed during his first term with an emphasis on transportation funding, as well as plans to expand broadband or wireless broadband via 5G to all Americans, promote domestic production, and increase investment in education, healthcare, and housing. Under his proposal, Mr Biden has called for an investment of $700bn on procurement and R&D to support industrial America and a total of $775bn for healthcare and education.

Mr Biden has stated that over half of his proposed spending would be tax-funded with the rest being funded through more borrowing. He said he would increase taxes on corporations from 21% to 28% and for individuals, earning above $400,000, to 39.6% from 37%. But with hopes fading that Democrats would secure control of the Senate, most of these plans remain debatable. For instance, if Republicans maintain control of the Senate, a limited stimulus package could be expected to be passed next year but a Republican-majority Senate would block Biden’s other proposals such as tax increases and more spending. Nonetheless, some of Biden’s other regulatory policy changes will be simpler to deliver as congressional approval will not be required and could be enacted via executive order.

A second Trump administration term, on the other hand, would likely result in a smaller fiscal stimulus package, which could be similar to the $650bn package submitted by Senate Republicans in early September and included support for small businesses and approximately $100bn in funds to states to finance education-related costs. Mr Trump would also seek to invest in infrastructure and expand broadband via 5G to all Americans. Besides this, his agenda is less obvious although more deregulation in industries such as healthcare and energy could be expected, along with worsening US-China relations and broader geopolitical uncertainty.

With regards to trade, GlobalData expects tariffs to decline under Biden administration, which should somewhat limit the rise of construction material costs that have increased substantially under the Trump administration amid heightened trade tensions between major trading partners. According to the National Association of Home Builders, tariffs imposed by the Trump administration in 2018 on building materials such as lumber, aluminium, iron, and steel added, on average, $9,000 to home costs, which continued to contribute to home price spikes.

As tariffs do not need congressional approval, Mr Biden could reverse all tariff changes imposed by the Trump administration on imports from China and other major trading partners via executive order and refrain from imposing new ones. However, this will not occur immediately after taking office as it might be subject to additional negotiations.

In terms of immigration, Mr Biden will be more open to immigration as he has pledged to reverse Mr Trump’s controversial policies, including increasing the number of employment-based visas granted each year. A higher influx of foreign workers would help the construction industry to boost the country’s housing supply and meet the government’s housing target with possible building costs reductions for construction companies and home buyers alike. It could also help address challenges in the industry such as the lack of skilled labour, which is causing wage inflation and additional increases in project costs as companies compete for best-skilled workers. The US construction industry relies heavily on foreign migrant labour for skilled and non-skilled roles, but Trump’s anti-immigration policies have largely stalled the country’s population growth, one of the housing market’s principal drivers.

As for the general impact on construction at the state and local government level, it is expected that authorities will continue to take steps to increase funds to finance infrastructure and green energy projects, regardless of which candidate wins the presidential elections or which party is in position to prop up state and local finances. Several states already have regulations in place to cut greenhouse gas emissions and become carbon neutral by 2050, a major priority policy under Biden’s proposals.

Nevertheless, increasing fiscal constraints and growing concerns over the sharp rise in public national debt are major downside risks to the construction industry’s outlook, but low borrowing costs should encourage more infrastructure investment through the issuance of new debt and municipal bonds. According to the Congressional Budget Office, the national debt is projected to reach 195% of GDP by 2050 while the fiscal deficit is likely to increase to $3.3tr, more than triple the level reached in 2019. In addition, an increase in inflationary pressure due to the projected stimulus and infrastructure spending is also a major downside risk to the outlook, and if Trump wins, the potential of a new Federal Reserve Chair, who is less willing to maintain the central bank’s independence, could add further pressure to inflation.

Overall, whoever wins the election, it may take time for campaign proposals to translate into actual programmes and have an impact on the industry and the wider economy. Historically, data on construction output have shown that during a President’s first year in office, there is generally a modest impact on the industry, but during the second year, the effect on the sector becomes clearer since new policies are put in place.