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Economic X-Ray: Examining Transportation Infrastructure

June 15, 2015
Cracks in transportation infrastructure?

Editor’s note: This is the first in a three-part series on economic drivers that extend beyond short-term data. As we strip the U.S. economy down to its studs, we’re looking to examine hidden cracks and potentially untapped investing opportunities. First up is our look at challenges in transportation infrastructure brought to light by the West Coast port shutdown and other, longer-running issues. Coming up: the shuffle for cloud and technology evolution; then, workforce skill shortages.

Market watchers scrutinize the major economic indicators for opportunities. While the usual metrics—jobs, housing—remain important, let’s not forget about what powers the flow of commerce: transportation infrastructure.

Our nation’s highways, bridges, railways, and ports are the bones of the U.S. economy. But some of those bones are aging, and that ultimately impacts economic health. For investors, economic strains matter, but so does spotting and tracking those companies that may hold the fix.

The Road to Stores is Paved with Potholes

Whether it’s perishable groceries in refrigerated trucks or oversized machinery on flatbed trailers, the American Trucking Associations (ATA) estimates that 70% of freight in the U.S. moves over the road. From seed to market or lab to patient, companies of all types depend on the trucking industry and a functioning highway system to get goods to distribution centers, warehouses, stores, and consumers. When the process works—meaning carriers can arrive and depart on time to deliver products efficiently—manufacturers can keep operating expenses in check, which improves profitability. But the state of today’s roads means that congestion and bottlenecks waste an estimated $9.2 billion annually, says the ATA. As the economy expands, many in industry and government believe that our highways and bridges are not up to the task.

How bad is it? According to the World Economic Forum, U.S. transportation reliability fell from the number five spot in 2002 to the 24th ranking in 2011. Over the past two decades, the American Society of Civil Engineers has assigned D grades to American transportation infrastructure. And one in nine bridges is deemed to be structurally deficient. Inefficient roads and bridges negatively impact speed to market and customer service, so spending is needed to overhaul infrastructure.

The Highway Trust Fund is nearly insolvent. Without going into the political funding quagmire, Congress has until the end of July to pass a bill authorizing long-term transportation investments.

A Port in Labor Dispute Storm?

Ports are in trouble, too. Recent labor disputes at critical West Coast ports created severe supply chain disruptions and massive export losses. For example, when containers can’t move off ships and onto waiting trucks or rail systems, fresh produce spoils and retail companies lose sales that are impossible to recover. This stoppage showed up in anything from weekly jobless claims data to quarterly gross domestic product (GDP).

With international trade contributing to 30% of the U.S. economy and 78% of U.S. exports by tonnage moving over the waterways, highly productive ports are vital to keep containers of tradable goods moving on and off the massive mega-ships. Yet, port facilities across the country face funding shortfalls and struggle to keep pace with Asia and Europe. The Journal of Commerce reported a startling difference in American port productivity and suggested that investments in better cranes, dredging projects to accommodate the mega-ships, and overall facility expansion would go a long way to reduce delays and fuel costs.

Supply chain analyst Adrian Gonzalez of Talking Logistics believes ports will continue to be an economic pinch point. “The next port crisis is in the works, and it’s being caused not by labor disputes, but by capacity and productivity constraints,” said Gonzalez. “And we don’t have the money, nor the luxury of time, to adequately address it.”

Are Trains the Ticket?

Railways aren’t immune to challenges, but the rail industry outlook is trending positive. Unlike roads, according to the Association of American Railroads (AAR), rail infrastructure is privately funded and maintained with more than $575 billion spent since 1980 to modernize tracks, bridges, and tunnels. Perhaps that private money has kept freight rail competitive. Railways move huge amounts of raw materials—about 70% of coal, 58% of metal ores, and 30% of the nation’s grain. And an increasing amount of finished goods that used to travel on trucks now travel via intermodal.

In 2013, the AAR estimates that over 12.8 million shipping containers and truck trailers—both imports and exports—were taken from ship to rail to truck via intermodal service. It’s a rapidly growing transportation sector that has a lower carbon footprint (trains have four times the fuel efficiency of trucks) and avoids some of the pitfalls of over-the-road transportation like congestion and driver shortages. On average, goods traveling via intermodal take about a day longer in transit but help companies shave transportation costs.

The Real Fix? Technology

It seems technology may be the hero in our crumbling infrastructure story. Through process and technology improvements—from GPS and RFID technology used to track and trace products to cloud integration and advanced supply chain management software—companies are finding ways to add efficiency and find operational cost savings. In warehouses alone, companies can use robotics, scanners, and software to automate orders and inventory status. Software also helps firms get a global picture of their supply chains to help remove language and currency translation barriers as well as integrate previously separate functions of procurement, manufacturing, and distribution.

"Technology, such as transportation management systems, can help reduce the number of trucks on the road or the number of miles they drive, which obviously alleviates the infrastructure issues," says Gonzalez. "This is done via more efficient loading and routing of trucks, reduction in empty backhauls, and shippers collaborating together to co-load their products on a single truck.”

Plus, there are potential disruptive technologies on the horizon. For example, autonomous vehicles, 3-D printing, and even drones may be able to circumvent expensive, costly road and water transportation to revolutionize how products get from factories to homes. The next ten years are sure to be interesting as companies make business cases for putting these emerging technologies to work in supply chains.

Driving It Home

It’s clear we have a long list of problems plaguing transportation. Perhaps the U.S. will find the political will to fund transportation infrastructure improvements, or maybe a combination of technological solutions will help skirt the problems altogether. As companies find ways to remain competitive, investors can research opportunities in a wide variety of sectors that just may provide future transportation solutions.  

Ahead of the Curve?

Discover solutions-driven transportation and tech stocks that may fit your investing strategy through TD Ameritrade’s vetted third-party research.

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