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'Cliff' Scenario Threatens Infrastructure

Wednesday, November 21, 2012

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The looming U.S. "fiscal cliff" could have disastrous implications for debt-financed bridges, tunnels, pipelines and other infrastructure, a global rating agency warns.

Fitch Ratings says the so-called cliff could trigger a second recession, a 2% decline in gross domestic product, and increased unemployment, all which would dramatically affect demand for U.S. transportation assets.

"Given the far-reaching effects of the fiscal cliff, it is not expected that Congress will allow these tax and spending cuts to take effect," said Michel McDermott, Fitch managing director and head of the U.S. transportation team.

"But were it to occur, the effect on airports, roads, tunnels and bridges could be significant and could pressure ratings."

Coal tunnel under construction
Wikimedia Commons

Preserving the integrity of tunnels, bridges and other U.S. transportation infrastructure is one of the National Transportation Safety Board's newly announced legislative priorities for 2013.

Under the cliff scenario, Fitch said airport volumes could range from flat to a decline of 5%. Road, tunnel, and bridge facilities would probably suffer smaller declines than those experienced in the 2008-09 recession because employment levels haven't returned to prerecession levels and the depth of the cliff scenario, as currently envisioned, is milder than the recent recession, the agency said.

The agency also said that the data it tracks "reflect an economy that is growing" and that traffic on roads, freight indices, and airport traffic all point to an economy on a somewhat surer footing.

NTSB 'Most Wanted'

Meanwhile this week, the National Transportation Safety Board (NTSB) added to the fiscal pressure by releasing a "Most Wanted" list for 2013 that is uncharacteristically heavy on infrastructure demands.

In identifying the top 10 transportation challenges of the year ahead, the safety board warned that cutting corners on infrastructure investment could have dangerous long-term consequences.

As legislators craft the fiscal future, said NTSB chairman Deborah A.P. Hersman, "they also need to recognize that there is a safety investment in doing some of these things, and it can result in lives saved, injuries prevented, and driving accident levels down," The Washington Post reported.

The NTSB list makes that position clear, with its emphasis on the need to rebuild roads, bridges, pipelines, and the air-travel system. Typically, the list has focused on narrower concerns such as teenage drivers and motorcycle safety.

"The thing with safety and infrastructure is that people don't really think about it having a seat at the table until something catastrophic happens," Hersman said.

Construction and Design Concerns

The infrastructure community's chorus of concern echoed that of the construction and design industries as all urged Congress and President Obama to avert the "cliff" scenario that has spawned fear of a potential recession.

Many believe that failure to act on the conundrum, which involves billions of dollars in tax increases and spending cuts, will further harm the nation's hardest-hit industries. 

Congressional lawmakers held the first of many "fiscal cliff" meetings at the White House on Friday (Nov. 16). Obama also met with business leaders from some of the top U.S. companies earlier in the week regarding the economic situation.

Office of the White House

President Obama and Congressional leaders hold the first of many meetings on how to avert the tax increases and spending cuts set to take effect Jan. 1.

'Urgent Business'

The fiscal cliff came about from dual economic objectives reflecting the need to introduce a fiscal stimulus into an inert economy and the need to deal with escalating federal debt. Packaged together as the Budget Control Act of 2011, tax increases of $400 billion coupled with $200 billion in federal spending cuts are scheduled to go into effect Jan. 1, 2013, unless Congress decides otherwise.

"I think we're all aware that we have some urgent business to do," Obama said at Friday's meeting.

Obama and the Congressional leadership agreed to do “everything possible” to find a solution that averts the fiscal cliff and promised to “work together to find a balanced approach” as soon as possible, according to a White House press release.

Amid the bruising economic climate of recent years, construction and design industry groups are more anxious than ever to get their voices heard.

Fir0002/Flagstaffotos / Wikimedia Commons

AIA reported that the budget cuts would lead to a loss of 60,000 jobs.

AIA: Don't Stop Progress

The budget cuts set for January would result in the loss of 60,000 jobs across the design and construction industry, defer maintenance on federal buildings, and bring progress to a halt, according to the American Institute of Architects.

In a Nov. 15 letter sent to Obama and leading Congressional figures, AIA President Jeffrey Potter, FAIA, said that the construction and design industries represent one in nine dollars of U.S. Gross Domestic Product and are thus “vital for continued economic recovery.”

“Budget sequester scheduled to take place in January would reduce federal investments in design and construction by more than $2 billion, with a potential job loss of an additional 60,000 workers across the design and construction industry,” Potter wrote.

AGC: Contractors Already Affected

The impending fiscal cliff is forcing contractors to keep bids low as businesses are reluctant to commit to investement, according to a statement by the Associated General Contractors of America.

“With so few projects to bid on, contractors are offering their services with little or no margin to cover materials costs,” said Stephen E. Sandherr, the association’s CEO, noting that recent U.S. Census Bureau data showed a 4.2 percent drop in public construction spending and a slackening in the growth of private nonresidential construction between September 2011 and September 2012.

“Congress and the administration have to find a way to avoid the catastrophic increases in taxes and cuts in infrastructure spending that threaten many construction firms and risk putting their employees out of work,” said Sandherr.

PCA: Act Quickly, Rationally

The Portland Cement Association (PCA) warned that inaction could "prompt a recession" and have a negative impact on the construction industry.

“Rational, quick action by Congress and the administration would minimize the short-term costs of narrowing the deficit and enact a somewhat more aggressive longer-term combination of tax and fiscal spending policies,” said Ed Sullivan, PCA chief economist.

“Under this scenario, the near-term disruptive economic aspects associated with the fiscal cliff are significantly reduced and real economic growth would be only marginally impacted.”

XF Law / Wikimedia Commons

AGC's CEO called potential  infrastructure spending cuts and tax hikes "catastrophic."

However, PCA points to a different outcome should a polarized Congress reach an agreement in March, after the tax and spending cuts go into effect. This would “slow economic growth and job creation; structural impediments to a construction recovery would worsen as job losses materialize,” the group says.

The group said if Congress addresses the policies by the first quarter of 2013, the delay will cause signifcant harm and a 2.7 percent drop in cement consumption, according to a forecast released Monday (Nov. 19).

A third possible scenario—a Congressional impasse, where Congress takes no action—could cause a severe recession and reverse recent gains in construction activity, PCA said.

“PCA considers the ‘rational’ Congress scenario as what will most likely occur in Washington,” Sullivan said. “However, although a Congressional impasse is the least likely, the actual outcome could reflect a blending of two scenarios.”


Tagged categories: Bridges; Construction; Design; Economy; Government; Government contracts; Infrastructure; Laws and litigation; NTSB (National Transportation Safety Board); Pipeline; President Obama; Transportation; Tunnel

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