By all accounts the U.S. economy and American stock markets look pretty healthy as evidenced by the benchmark S&P 500 crossing the psychological 2,000 mark earlier this week.
A big component to the economy and markets' rebound has been the steadily improving jobs market. Since peaking in Oct. 2009 at 10%, the U.S. unemployment rate has dipped 38% to just 6.2% as of the latest employment report from the Department of Labor. This has been aided by gains in nearly all industries, including a boost in manufacturing activity as well as a steady rebound in the housing sector.
But could the unemployment rate be on the verge of soaring in some states?
If Congress can't work out a long-term solution to the troubles plaguing the Highway Trust Fund, it's quite possible.
Stalled in the fast lane
The Highway Trust Fund is a mass transportation fund primarily responsible for the maintenance of our nation's roads and highways, as well as some aspects of energy infrastructure. The Fund generates its revenue from an $0.183 per-gallon federal tax on gasoline as well as the $0.244 per-gallon tax on diesel fuel and other excise taxes.
According to a report from The Wall Street Journal in May, the Highway Trust Fund provides about one-quarter of the $216 billion spent annually on highway and mass-transit construction projects and improvements. In other words, about $1 billion a week moves from this fund to contractors hired by the state and local governments to build and repair highways, roads, bridges, and other forms of infrastructure.
There's just one problem: The Fund is headed toward insolvency.
Despite a Congressional vote last month which saw both political parties come together to work out funding for the Highway Trust Fund through May 2015, its future beyond that point remains cloudy at best. Per the Department of Transportation, the Highway Trust Fund began the year with a cash balance of $10.4 billion following a General Fund transfer, but has seen that balance fall to just $6.5 billion as of the end of June. The Department of Transportation predicted that had nothing been done by Congress, the Fund would have run out of cash by September.
Here's the real concern
But there's more to this story than just new road construction and infrastructure repairs potentially being put on hold. This is an issue of sustained job creation.
According to the latest study from research firm Brookings, more than 14.2 million infrastructure jobs are at stake based on the action Congress takes moving forward, which, based on the nonfarm payroll employment figure from the Bureau of Labor Statistics for July, is more than 10% of the U.S. workforce.
Because these jobs represent such a vital component of the well-being of local and state economies, select states, as Brookings reports, are aggressively looking for ways to boost revenue in order to supplement an expected shortfall in Highway Trust Fund disbursements. Both Maryland and New Hampshire recently lifted their gas taxes in order to pay for improvements, while in Pennsylvania private groups have stepped up to fund bridge upgrades within the state.
However, a vast majority of states haven't acted. This could be because they're waiting to see what Congress does, or perhaps it could be because midterm elections are just months away and no elected officials want to be responsible for pushing through much-needed tax hikes in their state. Either way, if neither side does something soon, certain states could be facing a transportation budget shortfall that could translate into a lot of lost jobs.
Five states that could see their unemployment rate soar
Initially you might be under the impression that bigger states will lead to more infrastructure jobs lost if nothing is done -- and you'd be right.
Combined, California and Texas possess almost 2.7 million infrastructure jobs by themselves, with New York, Florida, and Illinois rounding out the top five. Cumulatively, these five states represent almost 4.9 million infrastructure jobs in this country -- but none of these five states is in danger of seeing their individual unemployment rates soar.
Instead, that honor goes to the following five states:
- North Dakota
Whereas the national average percentage of infrastructure employment by state is 11%, infrastructure jobs in the aforementioned five states represent between 15.1% of jobs on the high end (Alaska) to 13.2% of total jobs on the low (Louisiana). A reduction in transportation funding could be devastating to these state economies, which are particularly dependent on energy infrastructure such as transmission pipelines and power plants.
This could be bad news for contractors as well
Not only would a potential insolvency of the Highway Trust Fund be devastating for state economies and the jobs market, it would have the potential to negatively affect some well-known contractors as well.
Names to consider here that could be negatively affected if no resolution is reached, or if Congress merely sweeps the problem under the rug for another few months, include Fluor (NYSE:FLR), Vulcan Materials (NYSE:VMC), Caterpillar (NYSE:CAT), and Martin Marietta Materials (NYSE:MLM). These four companies represent a mixture of the brains, the brawn, and the supplies needed to build and upgrade our nation's infrastructure.
Fluor, for example, has its hands in a number of projects, primarily as a consultant in the energy infrastructure field. But it also has a government segment that provides engineering, construction, and logistics support. If there is a bright side here for investors, it's that Fluor's government revenue only accounted for 11.4% of total revenue in the recently released second quarter, and that its robust $40.3 billion backlog is predominantly tied to the higher-margin oil and gas industry. Still, a slowdown in a government segment, which is already producing subpar margins around 2%, wouldn't be good news for Fluor shareholders.
Both Vulcan Materials and Martin Marietta Materials -- which just expanded its infrastructure capabilities through the purchase of Texas Industries – supply construction aggregates, cement, and asphalt in a number of key markets.
Vulcan offers ready-mix concrete in California, Texas, and Florida, for instance, with asphalt mix available in California, Arizona, and Texas. In its latest quarter, Vulcan reported a double-digit increase in year-over-year aggregate segment revenue.
Martin Marietta, which also sells ready-mix concrete and asphalt products around the country, saw a 9% rise in shipments of aggregates to the infrastructure market in the second quarter on top of improved pricing for aggregates. If the Highway Trust Fund is forced to reduce disbursements in order to make ends meet, pricing and volume would likely take a hit for both aggregates suppliers.
Finally, as if heavy-duty equipment supplier Caterpillar needed to worry investors even more, it too could face headwinds. Caterpillar is already struggling with a downturn in global mining machine demand caused by weakness in global metals pricing. Tack on a possible slowdown in infrastructure growth in the U.S. and we have just another reason for short-sellers to potentially pile into Caterpillar's stock.
Rough road ahead
No one knows with any certainty what Congress or the individual states will do next, but one thing is for certain: someone's going to have to change lanes, because the current path that the Highway Trust Fund is on simply isn't sustainable. This is a situation that bears watching as it has the potential to alter U.S. economic growth and the jobs market, as well as affect your portfolio.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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