May 2016 Newsletter
Critical Infrastructure in Critical Condition
In This Month’s Issue:
We take a look at the state of our infrastructure and discuss implications of a further deterioration of these systems on the economy and our everyday lives.
It is easy to take our infrastructure for granted, most citizens likely never give the roads they drive on or the power lines above them a second thought, except when they hit a pothole or the cable goes out in the middle of a movie. The truth is that we have grown comfortable, and in that comfort we have allowed this nation’s infrastructure to fall in to a state of disrepair.
Every four years, the American Society of Civil Engineers (ASCE) does an audit on the state of our country’s infrastructure systems; bridges, roads, wastewater treatment, transit, water, etc. The most recent audit done in 2013 gave these systems an overall grade of D+, and estimated the needed investment to bring these systems up to an acceptable level by 2020 at $3.6 trillion. Yes, trillion with a t.
Figure 1 – 2013 ASCE Report Card on Infrastructure
The majority of categories fall in ‘D’ range on the most recent ASCE report card. This is a quadrennial report, with the next iteration due out in 2017. An estimated $3.6 trillion is needed to bring these systems up to a passing grade, but the cost of waiting may be far greater.
The symptoms of the underlying problem may occasionally catch your attention on the news; a train derailment, water main break or a bridge collapse. The may appear as isolated incidents, but these are generally manifestations of a larger and more widespread corruption of the overall infrastructure system.
Bridge inspection data from the Federal Highway Administration indicates that up to 60,000 of the nation’s 600,000 bridges are structurally deficient, defined as having major deterioration, cracks or other flaws that reduce its ability to support vehicles. Pennsylvania is among the bottom of the ranks in this category, with structurally deficient bridge rates exceeding 25% in come counties. In New York City alone, more than 2 million cars drive over the city’s structurally deficient bridges every day. The silver lining here is that we have made some progress since the 2013 report card was issued, when the number of deficient bridges was closer to 65,000.
The definition of infrastructure doesn’t just include the obvious systems of bridges, power plants and roads. The Environmental Protection Agency estimates that one in every four Americans lives within three miles of one of the country’s 400,000 hazardous waste sites, of which cleanup funding has an annual shortfall in excess of $500 million. Additionally, the lowest sub grade on the report card (D-) belongs to the nation’s 100,000 miles of levees. Many of these levees were originally designed to protect farmland but since their construction have been tasked with protecting nearby expanding suburban communities. As we saw in New Orleans with Hurricane Katrina in 2005, the breaching of a levee can have devastating consequences on low-lying communities. Granted, that was a rare direct hit by an incredibly powerful hurricane, but it should still serve as a cautionary tale and a testament to the importance of properly maintained levees.
Perhaps the infrastructure system we take for granted more than any other is the network of pipes, pumps and plants that deliver our fresh drinking water. Many of these pipes, especially in the oldest urban areas of the Northeast, are in excess of 100 years old and are at or near the end of their useful life. According to Philadelphia Water, over half of the pipes still operating in the city were installed before 1930 and some still in operation date as far back as the Civil War. With an estimated 240,000 water main breaks per year in the US, it will take up to $1 trillion to upgrade and replace these aging and failing pipes.
These systems are not a luxury. They are the foundation that supports the nation’s businesses and communities, moving people and goods efficiently and at a reasonable price, diving our industries and making possible the daily functions in our homes. It is important to understand that despite a perception that the Federal government is responsible for maintaining these systems, over 90% of non-defense public infrastructure assets are owned by the states and they pay 75% of the cost to maintain them. Further complicating the problem, capital spending has decreased dramatically in many states (figure 2). State and local government, along with citizen engagement can have more of an impact here than many people realize.
Figure 2 – Percentage Point Change in Capital Spending By State
Despite a common misconception to the contrary, the majority of infrastructure spending is done by the states, not the federal government. At a time when investment in improvement and expansion projects are needed the most, the vast majority of states have reduced spending as a share of GDP since the turn of the century.
There is far too much to cover on this topic in the span of a monthly newsletter, but I encourage you to visit the ASCE Report Card Website to learn more about the state of the different infrastructure categories and what needs to be done to improve them.
Chart of the Month
This chart illustrates the funding gaps between already allocated and necessary funding in order to meet the ASCE’s recommendations for infrastructure spending by 2020. One glimmer of progress recently made was the passage of a five year federal highway funding package, after years of stop-gap measures and political wrangling. However, despite the headline agreement, the new investments in that fund are in danger as they are contingent on future spending cuts in other areas of the budget, rather than an increase in the gas tax, which hasn’t been increased since 1992.
Important Disclosure Notices
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine what is appropriate for you, consult a qualified professional.
Investing involves risk, including possible loss of principal.
Securities offered through LPL Financial, member FINRA/SIPC.
Investment advice offered through Private Advisor Group, a registered investment advisor. Private Advisor Group and The Philadelphia Group are separate entities from LPL Financial.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
The S&P 500 is an unmanaged index. An index cannot be invested in directly.
Investments in foreign securities involve certain risks that differ from the risks of investing in domestic securities. Adverse political, economic, social or other conditions in a foreign country may make the stocks of that country difficult or impossible to sell. It is more difficult to obtain reliable information about some foreign securities. The costs of investing in some foreign markets may be higher than investing in domestic markets. Investments in foreign securities also are subject to currency fluctuations.
Tactical allocation may involve more frequent buying and selling of assets and will tend to generate higher transaction cost. Investors should consider the tax consequences of moving positions more frequently.
The prices of small cap stocks are generally more volatile than large cap stocks.
Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.
Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.