Federal infrastructure, clean energy spending is powering the economy and lifting GDP

A surge in government funding and related private investment is beginning to make its way to businesses and communities across the country, building electric vehicles, new bridges, airport upgrades and a host of other infrastructure and green energy projects that are juicing the economy — just when it needs it most.

The federal government has announced some $299 billion and has spurred another $503 billion in business investment that is providing a surprisingly quick and robust boost to the U.S. economy.

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The jump in private investment, in particular, is already filtering into the economy. Business spending on infrastructure, such as manufacturing plants, transportation equipment and software, rose 56 percent in the most recent quarter, accounting for 15 percent of the economy, according to data released Thursday by the Bureau of Economic Analysis. While it’s difficult to tell exactly how much of that growth directly resulted from the Biden administration’s policies, economists say the uptick in business activity is striking at a time when higher borrowing costs and tighter lending standards have curtailed other investments.

“We were expecting infrastructure spending to hit in 2024 and 2025, but it’s making its way through the economy much faster than that,” said Diane Swonk, chief economist for KPMG. “We’re getting renewed strength from infrastructure spending and other stimulus that is adding to the economy in a big way.”

The timing is key. Strong consumer spending, which makes up two-thirds of the economy, has been playing an outsize role in keeping the United States out of a recession, despite the Federal Reserve’s aggressive efforts to cool the economy enough to control inflation. Prices cooled off again in June, rising just 3 percent from a year ago, according to the Bureau of Economic Analysis, the Fed’s preferred measure of inflation.

But in recent months, Americans have begun thinking twice before splurging. Consumer spending, which spiked at the beginning of the year to 4.2 percent, has moderated since then, rising by 1.6 percent in the most recent quarter. And they are spending less on hotels and dining out, and more on necessities such as health care and insurance. The boost in infrastructure spending, both by governments and private companies, has helped bolster overall economic growth.

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“It’s been like watching a well-oiled relay race: Just when one part starts to drag — housing, for example, or manufacturing — it’s offset by strength somewhere else,” Swonk said.

In High Point, N.C., bright yellow electric school buses are suddenly in such high demand that the country’s largest manufacturer can hardly keep up. Thomas Built Buses has added an extra production shift at its plant and still orders are mounting: 160 buses being shipped to schools in South Carolina, 80 to Virginia, 54 to Pennsylvania.

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That burst in business — almost entirely from federal infrastructure funding that provides up to $375,000 per bus — is bringing in millions of dollars to Thomas Built Buses, supporting new jobs and helping build a network of electric-charging stations around the country. The company, which has put 450 zero-emission buses on the road since 2020, now expects to churn out many times that.

“We’ve seen exponential growth from infrastructure funding,” said Daoud Chaaya, vice president of sales and marketing at Thomas Built Buses, which is part of Daimler Truck North America. “It’s been the biggest propeller of exploding demand.”

The Biden administration estimates that three key pieces of legislation — the Inflation Reduction Act, Chips and Science Act, and Infrastructure Investment and Jobs Act — will eventually translate to roughly $3.5 trillion in funding over the next decade, including some $1 trillion from private businesses.

“Traditionally, you anticipate that when the government spends more, that crowds out private-sector investment,” said Gregory Daco, chief economist at EY-Parthenon. “But in this case, the incentives contained in the IRA and IIJA are leading to faster and stronger private-sector investment, especially at a time when interest rates are as high as they are.”

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As a result, many economists who predicted a recession this year now say the country appears poised to avoid a downturn. Morgan Stanley, for example, last week announced a “sizable upward revision” to its gross domestic product expectations for the year — raising its annual forecast threefold, from 0.4 percent to 1.3 percent.

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“The economy in the first half of the year is growing much stronger than we had anticipated,” Ellen Zentner, the bank’s chief U.S. economist, wrote in a research note. “The Infrastructure Investment and Jobs Act, which was signed into law in November 2021 … is driving a boom in large-scale infrastructure.”

Spokane International Airport in Washington state is receiving $23 million from the Transportation Department to move a busy road away from its main runway and construct an overpass that would eliminate two dangerous intersections known for crashes and fatalities.

Even before officials found out they’d been awarded the money, they’d already spent nearly $1 million demolishing old military facilities that were in the way of the project, as well as getting environmental clearances, consulting with civil engineers and professional grant-writing help. The airport is also in the process of hiring a project manager to oversee the upcoming work.

“There is no way we could’ve ever built this project with traditional federal and state funding programs,” said Larry Krauter, chief executive of Spokane International Airport. “It’s a real game-changing grant.”

Construction, to begin next summer, is expected to create 400 jobs. More importantly, Krauter said, the improvements will allow the airport to move cargo and passengers much more efficiently, making it a long-term investment in the region’s economy.

“At a high level, the laws are doing exactly what they were designed to do: They are getting money out the door to fund state and local projects,” said Adie Tomer, a senior fellow at Brookings Metro who focuses on infrastructure policy and urban economics. “We know governors, mayors and county executives have been waiting to get started. Now the federal government is willing to pick up part of the tab, and they’re ready.”

But it’s unclear whether those economic gains will translate to political points for the president, who has been touting his “Bidenomics” plan ahead of the next election cycle. Most funds are being disbursed through state and local governments, which means governors, mayors and other elected officials are often the public face of local efforts. Complicating matters further, many of these initiatives are years-long projects that can come with their share of annoyances, such as construction noise, closed roadways and population growth that could drive up housing costs.

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“It’s going to be a hard road for the Biden administration to explain to the American people what they’ve delivered and why it’s important,” Tomer said. “It’s hard for people to know why their road got repaved at a certain time or who paid for it.”

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In some cases, new efforts are also colliding with other forces in the economy, such as rising prices, worker shortages and ballooning interest rates, that are making it more difficult to complete projects quickly.

In Oregon, for example, the state’s transportation department says much of the $7 million it received in federal funds for pavement repair projects “will mostly be eroded by recent inflationary trends.” Chip manufacturers and broadband companies say it’s become difficult to find qualified employees. And at Des Moines International Airport, executives point to tougher lending conditions and higher borrowing costs as reasons they’ve had to defer construction on 12 out of 22 new gates.

“Because of inflation and increasing interest rates, we’ve had to take a pause and build this in phases instead of doing it all at once,” said Kevin Foley, executive director of Des Moines International Airport.

Nearly 50 people — including architects, managers and construction workers — are already at work laying out plans and extending the airport’s parking garage. When complete, Iowa’s largest airport will have nearly doubled its size and created hundreds of new jobs.

“We’re building this because we absolutely need it and now we have the funding to get started,” Foley said. “This will allow us to bring in additional flights and potentially new airlines that we can’t accommodate today because we’re simply out of space.”

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