Yes, your tree looks like it is rotting. Those plastic guards are not supposed to be on the tree year round. They are meant to protect the trunk when moving it from the nursery to your home and then again in the winter to prevent mice and voles from chewing on it. It does not allow air circulation. It should be put on in late October and removed the end of March/early April. I cannot tell from the photo how deep the rot has gone into your tree. You can try putting a sharp ice pick or similar object into the area. If it meets resistance, the wood is still solid. If it does in with little resistance, the interior is soft and probably rotting. In either case, it might be best to have a certified arborist come out and do an on-site diagnosis. You can find one by visiting this site and clicking on Find An Arborist. You can put in your zip code. http://www.treesaregood.org/