Is the US ready for a new deal?

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With the US economy coming under sustained pressure and with some likening market conditions to the 1930s, could it be time to implement a Roosevelt style ‘New deal’ to stimulate the economy and renew national infrastructure? Here, Mellon portfolio manager Jim Lydotes considers what might lie ahead.

Just twelve short months ago few could have predicted the crisis currently confronting the US economy. The crippling impacts of the Covid-19 coronavirus and a global oil price slump have driven parts of the economy into downturn conditions not seen since the days of the great depression. With over 40 million Americans now out of work and one in five households now deemed food insecure¹ the US economy finds itself severely challenged.

The response from government has been significant. In March a US$2trn emergency relief package was passed by the Senate and the US Federal Reserve has acted by slashing interest rates to zero, restarting large scale assets purchases and rolling out new initiatives – at times on an almost weekly basis². All of this has led some to speculate the US may be about to face the wider introduction of a Roosevelt era style New deal³ to boost the domestic economy and get America back to work.

The original New deal was nothing if not infrastructure focussed. The Works Progress Administration (WPA) created by the Roosevelt administration covered the US with 650,000 miles of road, built 78,000 bridges, erected 125,000 civilian and military buildings, and constructed or improved 800 airports.⁴

Can a latter day US administration really emulate the scale of this achievement through major infrastructure investment of its own? While this remains an open question, Mellon portfolio manager Jim Lydotes is hopeful that some new major infrastructure projects could result from the economic aftermath of the Covid-19 pandemic. His optimism stems partly from the fact that, despite deep US political divisions, infrastructure renewal is one area which enjoys wide cross-party support.

Infrastructure development is something we tend to have bi-partisan support for in the US. Essentially the one thing America’s main political parties broadly agree on is that our bridges, roads, airports and other areas of infrastructure have been underinvested in for a long time and infrastructure spend is something that might stimulate the economy at this difficult time,” he says.

Major parts of US road infrastructure alone are in particularly bad shape. According to some estimates, up to 25% of US bridges need upgrading and 64% of US highways are also in need of repair⁵. Lydotes sees key potential for infrastructure investment not just in roads and bridges but also areas such as airports and, potentially, power transmission networks.

US roads could significantly benefit from new maintenance. The country has also previously underinvested in airport infrastructure and could use funds to modernise these facilities,” he says.

There is also significant potential for investment in electricity grid systems. US states tend to have their own local dispatch networks and are therefore managed in a decentralised way – which can lead to some serious inefficiencies. We believe there is potential to invest, streamline and improve this system,” he adds.

From a wider investment standpoint, Lydotes believes regulated utilities could benefit from any wider infrastructure investment push and sees promising potential in the broader application of renewable energy such as solar and wind power.

Utilities can earn more money by growing their asset base. While it is normally hard to achieve this, any major new investment in renewables from wider infrastructure spend could expand the assets from which they are able to make a return. Any push to accelerate the growth of renewables should allow these utilities to grow faster than they have previously and could also lead to higher multiples for these companies, with investors reaping the benefits of this investment.

Whether or not the US government decides to dig deep and finance a major infrastructure overhaul after the coming US election, Lydotes feels there is still broad support for infrastructure renewal at both a political and public level.

Given the chronic state of disrepair we see in US infrastructure today, and the seemingly endless willingness of the US government to currently stimulate the economy with fiscal spending, we think this is again going to be the sole area that both mainstream candidates will agree on as they head into the November elections.

As we start to look beyond the Covid-19 pandemic, and with unemployment set to be increasingly elevated, there is no doubt more and more people are talking about infrastructure again and the potential for a Roosevelt type New deal programme for public works and investment,” he concludes.

¹Guardian.Jobless America: the coronavirus unemployment crisis in figures. 28 May 2020.
²Bloomberg Explainer. What the Federal Reserve has done in the coronavirus crisis. 09 April 2020.
³Express. Coronavirus breakthrough: How Trump could emulate FDR’s New Deal to rebuild US economy. 06 April 2020.
⁴American-made. The enduring legacy of the WPA when FDR put the nation to work. 24 February 2008.
⁵CNN Business. S&P US chief economist: how we can add $5.7trn to the US economy. 30 May 2020. Based on 2018 figures from the US Department of Transportation.

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https://www.bnymellonim.com/outlook/global-disclosure/

GE0158 78750, 7 Oct 2020

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