Economic Research: Millennials Are Creating Unsafe Conditions On U.S. Roads--But Not In The Way You Might Think Credit Market Services: Beth Ann Bovino, U.S. Chief Economist, New York (1) 212-438-1652; [email protected] Secondary Contact: Geoffrey E Buswick, Boston (1) 617-530-8311; [email protected] Table Of Contents Road To Nowhere (Baby, You Can) Drive My Car Little Deuce Coupe Freeway Of Love Go Your Own Way No Particular Place To Go I Can't Drive 55 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 19, 2015 1 1466580 | 302229998 Economic Research: Millennials Are Creating Unsafe Conditions On U.S. Roads--But Not In The Way You Might Think As banks, retailers, and consumer products companies continue their well-documented scramble to court so-called Millennials, the lifestyle choices of this newly adult generation are having a profound effect on a lesser-explored area of the U.S. economy: infrastructure. In the simplest terms, Millennials (which Pew Research defines as Americans born from 1982-2000, and called Generation Y by some) are driving less than older motorists did when they came of age--and when they do get behind the wheel, they are generally in smaller, more fuel-efficient cars. This, in turn, has curbed revenues from the federal gasoline tax, the primary source of funding for the Federal Highway Trust Fund, which is the backbone of the country's surface transportation infrastructure. This drop in funds available to construct and repair the country's infrastructure could, in Standard & Poor's Ratings Services' view, weigh on growth prospects for U.S. GDP, as well as states' economies, and, in some cases, where states and municipalities choose to replace the lost federal funds with locally derived revenues, could hurt credit quality. At a time when many state and local government budgets are strained--and austerity measures pervasive--the lost productivity and higher costs that inevitably accrue because of outdated infrastructure, combined with the need to borrow more to undertake refurbishment and repair projects, could hamper the ability of some governments to pay down debt. Meanwhile, lawmakers in Washington have held the federal gas tax at 18.4 cents per gallon (and 24.4 cents on diesel fuel) since 1993. If the gas tax had been indexed to inflation during that period, it would now be more than 30 cents per gallon. In other words, the roughly $25 billion a year the gas tax now raises (with 60% earmarked for highway and bridge construction) would be closer to $42 billion in annual revenue. Road To Nowhere On top of that, improvements in vehicle fuel efficiency over the past couple decades have rendered the gas tax an insufficient source of funds for infrastructure construction and maintenance, and the higher Corporate Average Fuel Economy (CAFE) standards now required will continue to erode the revenue-raising ability of the federal gas tax. Cars on U.S. roads are now more fuel-efficient than ever--and by a substantial margin, compared with just a decade or so ago. In August, the U.S. Environmental Protection Agency reported that adjusted fuel economy for light vehicles from model year 2013 was a record 24.1 miles per gallon (mpg)--0.5 mpg higher than vehicles manufactured a year earlier. For cars, that figure climbs to 27.6 mpg. All told, fuel efficiency has improved 25% compared with vehicles from model year 2004, the EPA reported. Meanwhile, perhaps the most important factor in all this is that, after steadily increasing for more than three decades, the number of vehicle miles traveled (VMT) peaked at 3 trillion in 2007 (just before the onset of the Great Recession), WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 19, 2015 2 1466580 | 302229998 Economic Research: Millennials Are Creating Unsafe Conditions On U.S. Roads--But Not In The Way You Might Think and has yet to return to that level (see chart 1). Certainly, this is, in large part, a result of the economic slump that the U.S. is still struggling to put firmly in its rearview mirror. Personal travel is highly correlated with economic factors--in particular, employment and income--and the Great Recession hit young Americans especially hard. Chart 1 And while unemployment rates for the young have always been higher than for older workers, the gap between the two has widened. In 2008, one in five workers ages 16-24 was out of a job, almost three times the rate of older Americans. On top of this, businesses are taking advantage of technological advancements, using more video conferencing rather than in-person meetings, to save on travel costs. At the same time as high unemployment among the young reduces work travel and limits discretionary spending (which eats into other travel and transportation), the lifestyle choices made by the newest cohort of American drivers are also playing a significant role in the decline of VMT. For example, Millennials are generally marrying and forming households later in life than preceding generations did. American Millennials' average age of marriage is 27.1 for women and 29.1 for men--both all-time highs. As it stands, slightly more than one-quarter of Millennials age 18-32 are married, compared with nearly two-thirds of the Silent Generation (Americans born in the mid-1920s through the early 1940s) who had tied the knot by the same age, WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 19, 2015 3 1466580 | 302229998 Economic Research: Millennials Are Creating Unsafe Conditions On U.S. Roads--But Not In The Way You Might Think according to Pew Research (see "Millennials And The U.S. Economy: The Kids Are All Right (Or Soon Will Be)," published April 29 on RatingsDirect). This propensity to marry and have children late, to rent instead of buy homes, and to live in cities has had a profound effect on travel behavior. Suburban areas, where driving is the predominant mode of travel, have seen the fastest growth in their aging populations. Meanwhile, transit ridership in the U.S. grew each year from 2010-2014--and this year may continue that trend. In the first quarter, nearly 2.6 billion trips were taken on U.S. public transportation, according to a June report from the American Public Transportation Association (APTA). While that's down 0.7% from a year earlier, a historically frigid and snowy winter across much of the Northeast--along with gas prices almost a third lower--affected ridership, the report said. In fact, there was a collective increase of 0.6% in trips on subways and commuter rail lines in the first three months of this year, the nonprofit advocacy group reported. Along these lines, VMT and passenger miles traveled (PMT) declined more than 20% among Americans ages 16-30 in the decade leading up to the recession, according to a study by the Federal Highway Administration's (FHWA) Office of Policy Transportation Studies (see chart 2). And in a 2013 report to Congress, the FHWA, the U.S. Department of Transportation, and the Federal Transit Administration said that youth PMT on all modes of transportation in 2009 was just 80% of what it was 1995 and 2001--while youth VMT was only 75% of what it was in those years. Driver's licensing rates have also declined somewhat. In 1995 and 2001, 86% of American males ages 16-28 were licensed drivers--a figure that dropped to 80% in 2009, the study showed. (The licensing rate remained stable at approximately 82% for females.) More recent data from the FHWA indicate that the percentage of licensed drivers remained low through 2013, despite an improvement in the U.S. economy. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 19, 2015 4 1466580 | 302229998 Economic Research: Millennials Are Creating Unsafe Conditions On U.S. Roads--But Not In The Way You Might Think Chart 2 These trends coincide with an increase in Americans' support for public spending on infrastructure. A study in July by the APTA and the Mineta Transportation Institute showed that 75% of Americans support using tax dollars to "create, expand, and improve public infrastructure in their communities." The study also said that 70% of respondents want Congress to increase public spending on the country's infrastructure. (Baby, You Can) Drive My Car Granted, Millennials' geographical preferences may change as they get older, marry, and have children. Data on housing starts and sales suggest that this may already be happening--and signs that wages are starting to rise in earnest as the job market continues to strengthen are adding to this optimism. Wage gains held at 2.2% year over year in September, and even with the September slowdown, jobs gains are still averaging over 200,000 per month for the year To be sure, a period of fairly low gas prices has resulted in a slight increase in VMT--and, thus gas-tax revenue--in the past 18 months. In fact, year-to-date VMT growth has accelerated to 3.0%, according to a September report from Wells Fargo Securities. Still, this has made for little relief for the Federal Highway Trust Fund, the report said. Even as gas-tax receipts have WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 19, 2015 5 1466580 | 302229998 Economic Research: Millennials Are Creating Unsafe Conditions On U.S. Roads--But Not In The Way You Might Think jumped 4% so far this year, in August the fund still needed an $8 billion transfer from the U.S. General Fund to provide funding until May. And while increased tax revenue has allowed funding to stretch into next year, the authorization to spend money from the highway fund expires at the end of this month, requiring Congress to act by then, and the balance in the fund remains below the $4 billion "prudent" cash level.