The American Recovery Project: A Strong Economy Starts With Strong Infrastructure

by David Fessler, Energy and Infrastructure Expert
Friday, July 2, 2010: Issue #1294

“Every problem is just an opportunity in disguise.”

Given my optimistic nature, that’s my mantra.

And I saw plenty of “the problem equals opportunity” equation on a 175-mile bike ride through Cape Cod last weekend. The event was a fundraiser for the National Multiple Sclerosis Society and the sorry state of the roads on our route was apparent. Our team spent much of its energy dodging potholes.

But it wasn’t just the local roads that were pock-marked. About half of the Interstate roads between the Cape and my home in Pennsylvania were in bad need of attention, too. It seems to get worse every year.

My advice? Get used to lousy roads. And the reason is simple…

State Budget Blues

Most state budgets are so far underwater that fixing roads isn’t even on their radar screens.

Yes, I saw some repairs being made. But I passed by several other roadwork projects that looked as though they’d been abruptly halted. No workers, no equipment, nothing happening.

And it’s not just the roads that are suffering either. State parks, recreation areas and other services are all falling victim to dwindling state revenues.

And when you learn that every state except Vermont has some form of law that requires them to balance their budgets every year, it’s no wonder that state comptrollers are tearing their collective hair out.

In January, data from the Center on Budget and Policy Priorities (CBPP) – a government spending policy think-tank – indicated that 40 states projected 2010 budget deficits totaling $33.9 billion.

Fast-forward six months and things have gotten worse. A lot worse…

A $200 Billion Black Hole

The latest numbers from the CBPP show that 48 states are dealing with a combined budget shortfall of $200 billion this year.

Do the math and you’ll see that this is a 490% surge in just six months.

It’s also the largest collective state budget gap on record at the CBPP.

And for 2011? Don’t be fooled by the current budget gap estimate of $112 billion. While it looks better, that number is likely to rise as tax revenue continues to fall amid a still-raw economic recovery and the national unemployment rate hovering close to 10%.

Services Down… Taxes Up

States were able to close some of their 2009 and 2010 gaps via federal funds from the American Recovery and Reinvestment Act (ARRA). But with just $40 billion remaining, that funding source is nearly tapped out.

So with less federal money available to close state funding gaps, what’s the solution?

Well, by law, budget gaps need to be closed. But with federal assistance and state revenue shrinking, most Americans can expect a further curtailment of state-related services.

On top of that, it will come as no surprise to see taxes raised.

Unemployed citizens represent a double-whammy to the system. Not only aren’t they paying taxes, they’re receiving benefits that are draining state coffers.

A Mess Out West

Perhaps the worst example of state budget management is in California. Its economy stands as the eighth-largest in the world… but the state has been broke for the past two years.

It’s tried to stay afloat by borrowing more money, furloughing workers and raising various fees. But it’s done nothing more than kick the proverbial can down the road. The state’s 2011 fiscal year began on Wednesday with a $19 billion budget deficit.

And incredibly, it still has no viable budget framework from which to operate.

“American Recovery and Reinvestment Act… Part Two”

Without additional help from the federal government, U.S. states will face an ugly fiscal abyss.

The ensuing dramatic steps that they’ll be forced to take to shrink their deficits could shave as much as a full percentage point off U.S. GDP next year. And in turn, that could trigger as many as one million additional layoffs in 2011.

It’s a real mess. And to head off the next potential Armageddon, my guess is that the federal government will just pony up more money to the states for several more years.

Call it “ARRA – Part Two” or whatever you want. But the bottom line is we’re a long, long way from “economic recovery.”

To be fair, some of the ARRA money that states have received has gone towards infrastructure projects. But most of the companies performing the work are just using existing workers, rather than hiring new ones.

Here’s what we really need: a focus on industries that can truly create new jobs.

And if you’re a regular reader, you’ll know where I’m going with this…

The Manhattan Project… Energy and Infrastructure-Style

I’m talking about a concerted effort on energy and energy-related infrastructure.

Specifically, weaning ourselves off our obsession with foreign oil is leading the list of needs. Let’s call it the energy and infrastructure sectors’ version of the Manhattan Project (which was a U.S.-led operation to develop atomic bombs during World War II amid fears that Nazi Germany was doing the same.)

That means developing areas like wind power, increasing solar installation, manufacturing more electric cars and shifting towards natural gas as a transitional fuel for cars.

Keep the money and the jobs here and states won’t have to worry as much about where the revenue will come from. After all, a strong economy starts with strong consumers. And they can’t consume if they don’t have jobs.

If you want your portfolio to have some exposure to the infrastructure sector, consider the biggest and best engineering firms like Jacobs Engineering Group, Inc. (NYSE: JEC) and Fluor Corporation (NYSE: FLR).

Watch the press releases that these firms (and others like them) put out, as they can provide clues that infrastructure spending is ramping up – and where the money is going.

Good investing,

Dave Fessler