Beyond Roads and Bridges: How Trump's Infrastructure Spending Plan Could Grow Auto Sales

Beyond Roads and Bridges

A key component of President Trump's plan to "Make America Great Again" involves a massive infrastructure spending program, aimed at improving our deteriorating roads, bridges and other basic facilities and spurring economic growth with job creation. As proposed, the infrastructure spending will be spread out over 10 years and has potential to improve stagnating auto sales. While this program likely won't return the industry to the double-digit sales growth, we project that the first year alone could generate additional new-car sales of 1 percent to 3.75 percent from job creation and even more when multiplier effects kick in.

What It Is:
This proposed policy calls for spending $1 trillion or more over the next 10 years to give a face-lift to the nation's roads and bridges and fund other projects such as water systems, veterans hospitals, low-income housing and internet access. It also promises to be fast-acting, with the president recently specifying that projects would need to be started within 90 days to get funding. One key element that remains unclear is who will pay for the spending. Democrats favor a government-funded program while Republicans prefer a public-private partnership in which private companies furnish some or all of the capital in exchange for tax credits or the right to collect tolls or similar service fees from the completed infrastructure.

Impact: Should Be Positive
Beyond building much-needed infrastructure, one important effect of such a spending plan would be to create jobs. For example, the plan proposed by the Democrats in January promised to create more than 15 million jobs over the next 10 years. This amounts to 125,000 new jobs per month on average — a substantial amount in the current market. (To see this, consider that economists are estimating about 145,000 jobs need to be added per month to maintain the unemployment rate and possibly as few as 50,000 to 100,000 jobs.) Meanwhile, the Federal Reserve has projected the unemployment rate will remain flat over the next three years and rise only slightly after that, implying that the 125,000 jobs added per month by the infrastructure plan could well lower unemployment and/or lure more people into the labor market, either of which would result in economic growth. Lowering unemployment with the proposed good-paying, middle-class jobs has high potential to bring additional new-car buyers into the market.

In fact, based on Edmunds' analysis, new-car sales could increase at a rate ranging from 1 percent to 3.75 percent in the first year of the program alone, just based on higher retail purchases. These estimates assume that jobs would be in the construction industry and in a range around the average salary for that industry ($48,900 is the average, and the assumed range is $40,000 to $74,999). For the low endpoint of expected growth, new-car purchase estimates are based on the annual purchase rates for all U.S. households in this income range (12 percent in 2016). The high growth endpoint takes into account the strong likelihood, based on survey evidence, that new job holders will purchase a car. Adding fleet purchases by businesses to accommodate additional employees from job creation would further increase growth in new-car sales. Furthermore, these estimates do not take into account the multiplier effects of the new jobs throughout the economy (on economic growth, jobs and income) that could generate even more new-car sales. For example, the Bureau of Economic Analysis has estimated that 1.8 jobs are created for each job added in the construction industry. Such additional growth would nearly triple the impact on new-car sales growth estimated above.

These impact estimates carry a couple of caveats. First, opinions are mixed about whether sufficient skilled labor exists in the construction industry to meet expected demand. Finding and training new labor would require time, potentially delaying the impact of the policy on car sales. Second, the impact also depends on how the program is structured. The above analysis assumes that the program would support new projects. It is unclear how much job creation would occur if tax credits could benefit only existing projects, for example, due to requirements to implement the projects within a certain time frame.

Likelihood of Implementation: Reasonably High
The White House indicated recently that an infrastructure plan will soon be released. Importantly, this initiative has a potentially broader support base than Trump's White House. For example, the American Society of Civil Engineers recently gave the country's infrastructure a grade of D+ and proclaimed that $3.6 trillion in spending is required by 2020. Both Democrats and Republicans support the idea, which makes the plan more likely to gain approval from Congress. The key potential roadblock is likely to come from a difference in opinion about who should pay for the program and how to procure the necessary funds. The government would not be able to fund the program without going into greater debt absent spending cuts. Deficit-increasing programs can be a hard sell to Congress. A public-private partnership would alleviate some or all of the government's need to finance the program, but it would require private companies to participate and not all elements of the program offer promising ways to recover investment. Assuming the parties can come to an agreement over funding, we expect to see a plan approved later this year and projects (and jobs and increased car buying) beginning in 2018.

For additional Edmunds commentary on the impact of Trump's policies on new-car sales:
Peak Auto Sales Still to Come | Trump's Tax Cuts Are Not Likely to Bring Much Windfall to Auto Sales | Trump's Tariffs Could Import a Big Hit to New-Car Sales

Lacey Plache is the chief economist for Follow @AutoEconomist on Twitter.