Construction Spending Rises: Where Are Millennials in the Market?

(Continued from Prior Part)

The Keynesian debate

While private construction is the lion’s share of construction spending, public construction also matters. The use of public construction dollars has historically been the big lever the government uses to stimulate the economy. This dates back to the New Deal and was used as recently as 2009 in the American Recovery and Reinvestment Act.

The use of federal construction dollars to raise demand in the economy has been an issue of tremendous debate. Generally, the left seems to believe that a Keynesian pump-priming exercise would both alleviate suffering and help the economy. On the other hand, the right tends to argue that Keynesian spending’s track record has been mixed at best.

Opponents cite Japan as an example. The country took its debt-to-GDP ratio to 2.2x, pursuing public construction to stimulate the economy. It has had little to no economic growth to show for it. Japan may have reached the point where public debt has become so large that it acts as an economic anchor.

Stimulus plans

The stimulus plan from early in President Obama’s term has been credited by its adherents for turning around the economy. But it’s been characterized as a waste of money by its detractors. Did the American Recovery and Reinvestment Act stop the tailspin? Or was it the Troubled Asset Relief Program? These arguments are impossible to prove one way or the other.

The crumbling infrastructure argument

Democratic Presidential candidates Hillary Clinton and Bernie Sanders are arguing for a big public spending program—often referred to as infrastructure investment—to create jobs and address infrastructure issues. The underlying premise is that US infrastructure has been allowed to fall into disrepair due to limited government spending.

As you can see from the chart above, public construction as a percent of GDP was pretty constant for almost 30 years until President Obama’s stimulus measures pushed it up to highs not seen since the Carter administration. While public construction spending did fall off after the stimulus ran its course, it’s hard to make the argument that public construction has been neglected. Note that Congress is in the process of passing a bipartisan highway bill that will raise transportation spending. Congress managed to fund it with money from the Fed instead of raising the gasoline tax.

Recovery

As we discussed in the previous article, home price appreciation indicates that we have a tight housing market in general. As the Millennials get jobs and work off some of their student loans, they could start looking to buy.