News Analysis date published New: 
Friday, December 14, 2012 - 11:30
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Monday, December 17, 2012 - 09:02
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Friday, December 14, 2012 - 11:30

The $2 Trillion Crisis Nobody is Talking About (Part 1)

Friday, December 14, 2012 - 11:30am

Teachers rarely dispense a "D" grade. They only do so when performance has been utterly lousy, or when they want to signal that without a better effort, a failing grade may be next. At least that was the logic behind the American Society of Civil Engineers (ASCE) and their quadrennial look at our nation's infrastructure four years ago. Soon after President Barack Obama took office in 2009, they slapped a "D" grade on the crumbling infrastructure of the United States.

Call it "the wake-up call that went unnoticed." Legislators in Washington have accomplished little since then, so our nation's highways, bridges, byroads and water systems have suffered from even more benign neglect. Next month, soon after President Obama's inauguration, the ASCE will again weigh in with its report card. Will it actually issue an "F" grade this time around? And would that force Washington to finally address the issue?

A pennywise logic
Under the twisted new logic of Washington, there is no need to spend money in areas that don't immediately need them. But such logic is pennywise and pound-foolish. Take the I-35 Mississippi River Bridge collapse in Minneapolis back in August 2007 as an example. Engineers knew the bridge was showing deep signs of stress (in 1990, the federal government gave the I-35W bridge a rating of "structurally deficient," citing significant corrosion in its bearings), but minor fixes led them to conclude the bridge could hold up just fine for a little longer.

Well, once the bridge finally collapsed, 13 lives were lost, another 145 people were badly injured and the region would suffer crippling delays for more than a year while a new bridge was being built. The fact that the new bridge was built in just 13 months means contractors had to work double-time, which means higher costs. Remarkably, the Minneapolis bridge was just 36-years-old when it when it broke apart. Many of our nation's bridges are far older, with the average U.S. bridge being roughly 43-years-old.

Even more remarkable is the fact that 73,000 bridges in the U.S. are deemed "structurally deficient." The ASCE figures it will take $2.2 trillion to completely upgrade the country's crumbling infrastructure. And that's up $600 billion from the previous forecast from 2005. In effect, the longer we defer that spending, the worse the problem becomes.

It may be wiser to view these costs as investments rather than expenses. The San Francisco wing of the Federal Reserve studied the issue and found that every dollar spent on infrastructure brings a positive return. It used highway spending as an example and found that "each dollar of federal highway grants received by a state raises that state's annual economic output by at least two dollars, a relatively large multiplier."

A 2013 deal
Thankfully, awareness of the infrastructure problem is growing in Washington and President Obama is pushing for $50 billion in fresh infrastructure funds in current budget talks. Sure, it's hard to see where we'll get the money in these budget-constrained times, and any effort to revamp the U.S. infrastructure radically will take many years. But these problems won't simply go away.

The longer-term price tag will be formidable. Former Pennsylvania governor Ed Rendell has suggested that the government needs to spend an extra $180 billion a year for five years just to start to make a meaningful dent in the problem. That's roughly $600 for every man, woman and child in the United States, every year.

Where would that money go? The various assets that need to be addressed include:

Of course, state and local taxpayers will bear some of the burden. And the private sector may pitch in through the development of toll roads, airport privatizations and such. A hike in excise fees such as local gasoline taxes are sure to happen. In fact, the national highway gasoline tax, stuck at 32 cents a gallon s

ince 1993, is quite likely to rise around 50 cents a gallon in 2013.

How do Americans feel about a boost to infrastructure spending? They're divided. About 69% of Democrats support President Obama's goal of injecting $50 billion in infrastructure spending as part of the "fiscal cliff" compromise, according to a recent poll conducted by the Huffington Post and market research agency YouGov. But only 24% of Republicans support such a move, while a plurality of independent voters (38% for vs. 26% against) say it's a wise move.

Action to Take --> Inaction is becoming less of an option. A major infrastructure problem, such as another collapsed bridge, may be just around the corner.

As noted earlier, we're just weeks away from hearing about the ASCE's next report card. Will the U.S. infrastructure get a better grade this time around? "We haven't really invested additional money, so I would be hard-pressed to believe that the grade would improve," ASCE president Greg Diloreto told Bloomberg News this past summer. If anything, tight state budgets mean that basic maintenance on many infrastructure items has been cut back, so the possibility of a "D" grade is quite high.

For investors, there is a silver lining. In part two of this analysis of our nation's infrastructure, I'll focus on the investment opportunities what will arise from the eventual upturn in infrastructure spending. Many of these firms have been suffering through a lean stretch, but could be poised for much better days ahead.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.