The release of the latest GDP data brings with it updates to a couple of key trends in government investment, infrastructure spending, and longer term GDP growth rates. The latest data does little to change the picture, but it certainly highlights what are some key trends for investors. The slump in government investment has arguably been a factor in accentuating the longer term decline in economic growth in America, and with the longer term GDP growth rate now bottoming out, any movement in policy here could have big implications for the medium term growth outlook, and as I show below, equally big implications for where bond yields go next.
The points to note on US government investment and long term GDP growth trends are:
-US government fixed asset investment remains around record lows as a percentage of GDP.
-The decline in government investment seems to mirror the long term decline in US economic growth.
-More recently the decline in long term GDP growth rates looks to have bottomed, and this lines up with the bottom in US government bond yields.
-Private investor interest in infrastructure assets appears to be growing, which is important given the decline in government investment spending.
1. US Government Investment Trends: With the latest round of GDP data for Q1, it's a good opportunity to update this chart which tracks the level of US government investment. And well, not much has changed. In the post-war boom period government investment (both Federal + State & Local government) was booming, with government fixed asset investment running at a pace of almost 3.5% of GDP. Even after that boom time, government investment averaged around 1.5% of GDP up until recently, where it has barely gone beyond 50bps vs GDP.
With the downward trend in government investment spending across time, it's little wonder that US infrastructure ratings are at such poor levels. And while infrastructure investment is not a cure-all for driving economic growth, it certainly has an important enabling effect, not to mention the one-off boost (which we know from studying China, works very well - they have used it time and again as a counter-cyclical policy tool).
2. US Long Term GDP Growth: What happens next with government investment could have a key bearing on the trend in US GDP growth, which has been in steady decline over the past few decades. A pickup in government investment, focused on infrastructure, along with the tax cuts which have already been delivered could provide a catalyst to trigger a medium term upturn in GDP growth, which as the chart below shows could have a key bearing on the direction in bond yields. Indeed, if you want to understand why the US 10-year treasury yield has risen towards 3% you need only glance at the chart below.
3. Infrastructure ETFs: Thinking about trends in US government fixed asset investment, and the need for infrastructure upgrades and modernization, and what was an initial false start for an infrastructure spending plan (which now seems likely to be tabled for serious discussion after the US mid-term elections later this year), it's interesting to note the rise in popularity of infrastructure ETFs.
While many infrastructure projects are government built and operated, there is a substantial and growing stock of private owned/operated infrastructure assets. The circa US$3billion in infrastructure equity ETFs is barely a drop in the water compared toe Trump's vision for a $1.5 trillion infrastructure program, it goes to show that there is at least growing investor interest in this asset class, and with the government seemingly dropping the ball on infrastructure investment, it likely will come down to the private sector to do the heavy lifting.
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