A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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Dec 19 2016

The Great Neglect of American Infrastructure

For years, politicians have bandied about infrastructure spending as a potential panacea for slowing U.S. economic growth, given the prospect of both short-term gains – new construction jobs – and potential long-term benefits – increased productivity. Now, with President-elect Trump coming into office alongside a Republican-controlled Congress, there is an expectation that a massive boost to infrastructure investment is in sight, as Mr. Trump’s campaign included a plan to spend a whopping $1 trillion on infrastructure, albeit over ten years.

For perspective, per the American Society of Civil Engineers, the U.S. needs $3.6 trillion in infrastructure spending by 2020 just to repair its current infrastructure. Although such estimates may prove overstated, they highlight how even a trillion-dollar proposal falls far short of what is required just for maintenance, let alone expanding infrastructure.

Still, increased spending is a step in the right direction, given that the nation’s infrastructure has been aging for decades. In fact, the average age of nonresidential structures (which zeroes in on infrastructure categories) owned by the Federal government has been rising steadily for more than seven decades for both nondefense (Chart, light blue line) and national defense (dark blue line) assets. National defense assets’ average age troughed during World War II at 5.8 years, but sits at a record high of 45.9 years as of 2015, while the age of nondefense assets – such as utilities, schools, hospitals, and highways and streets – also reached a record high in 2015 at 33.7 years.

For state and local governments (green line), nonresidential structures – comprising the same categories as Federal nondefense assets – have been aging, on average, since 1969, and hit an all-time high of 25.1 years in 2015. In the private sector (gold line), the age of nonresidential structures has been increasing since the mid-1980s and reached a 54-year high in 2015 of 22.9 years, though this also includes some non-infrastructure categories like offices, manufacturing, and lodging.

Clearly, this broad, steady increase in the average age of nonresidential structures is directly linked to a persistent lack of investment. In other words, spending on infrastructure is long overdue. That said, the Achilles’ heel of the U.S. and other developed economies is low productivity growth, and therefore the question is how far this infrastructure spending will be productivity enhancing. Here our latest analysis sheds some light.

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