Victory for the Republican candidate, Donald Trump, in the US presidential election has shocked markets globally, a response that reflects heightened political risk in general and the uncertain outlook for the US economy and international trade. However, with Mr Trump’s positive rhetoric for spending on infrastructure, and the fact that the Republicans have maintained control of the US Congress, prospects for growth in the US construction industry remain positive.
In his victory speech, Mr Trump spoke of his determination to rebuild US infrastructure – its roads, bridges, airports, schools and hospitals – as well as “fix” its inner cities. In the lead up to the election, Mr Trump did not reveal any specifics with regards to an infrastructure investment plan, aside from his campaign pledges to “at least double” Hillary Clinton’s spending proposals. The defeated Democrat Party presidential candidate had revealed plans to deliver a US$275 billion, five-year program for investment in transportation, water, energy and other projects, as well as launch a federal infrastructure bank. There were differences in energy plans. Mrs Clinton’s Democrats had proposed plans to ensure 50% of electric power came from “clean energy sources” within 10 years alongside proposals to eliminate tax breaks for fossil-fuel-producing companies. Mr Trump’s party is more in favour of fossil fuels, and it has proposed support for “cost effective” private development of wind, solar and other renewable power sources.
There is certainly a need for the incoming administration to boost spending on infrastructure in the US. According to the American Society of Civil Engineers, the backlog of infrastructure projects is expected to cost US$3.6 trillion by 2020. Under the outgoing administration of Barack Obama, total public capital investment (which includes infrastructure) stood at US$611 billion in 2015, the equivalent of just 3.4% of GDP, and the lowest in more than 60 years, according to data from the president’s Council of Economic Advisers. Part of the problem for the Obama administration had been the lack of support in Congress, resulting in failure to push ahead with spending plans, despite the record-low borrowing costs.
It is likely that Mr Trump’s administration will push ahead with infrastructure development plans; in so doing, he will ensure the creation of jobs and improve the prospects for stronger economy growth in the long-term. Nevertheless, there are still many unanswered questions relating to how in fact the administration will raise the funds for such projects, such as through tax reforms or a stimulus spending bill, and whether such policies will be passed by the Congress. A combination of tax cuts and increased spending on infrastructure, in addition to other campaign pledges to ramp up in defence spending, would certainly result in a sharp rise in the fiscal deficit and push public debt to even higher levels.
Timetric’s Construction Intelligence Center (CIC) is currently forecasting annual average growth (in real terms) in construction output of 3.3% in 2016–2020, based on the assumption of economic growth of just over 2% a year. This forecast was based on a victory for Mrs Clinton, which would have meant a broad continuation in policy.
Following Mr Trump’s victory, there is likely to be a marginally slower rate of economic growth in the short-term, as market turmoil and heightened uncertainty over key domestic and international policies curtails investment spending. How the longer term forecast will be adjusted depends on whether Mr Trump sticks with some of the more controversial polices that could greatly undermine economic growth, notably plans to impose severe trade protection measures and to place strict controls on immigration. On the one hand, if his administration proceeds with plans to enact trade controls, particularly with respect to imports from China, this could quickly escalate to a global trade war with dire consequences, not just for the US economy, while tighter controls in immigration (and the possible deportation of 11 million undocumented immigrants) could slow population and productivity growth. Such an outcome would undermine domestic consumption and investment growth, and curtail demand for new construction projects.
On the other hand, assuming Mr Trump’s fiery campaign rhetoric is toned down when he takes office, and his administration follows a less hard-line approach to trade and immigration, there is unlikely to be any major downturn in the US economy during his administration’s four-year term in office. Moreover, if his administration pushes ahead swiftly with infrastructure development spending, there is scope for an upward adjustment to the forecast growth in construction output.
Certainly, the outlook will become clearer when Mr Trump takes office (in January 2017) and unveils more detailed plans related to key economic policies and infrastructure spending plans. However, the CIC’s view is that the clean sweep for the Republicans in the presidency and Congress is on balance positive for the US construction industry, with the potential for increased infrastructure spending offsetting the negatives that would stem from the delivery of Mr Trump’s contentious policies