Economic Insights - October 2 - 6, 2017
- Weekly economic wrap: This week’s data suggests the synchronized global economic expansion is alive and well, and will persist well into 2018. September’s U.S. payroll report showed job losses, but the details revealed a robust, resilient job market.
- The Fed says it’s December: Officials suggest the next rate hike will happen in December, and the data agrees. President Trump will fill several openings at the Federal Reserve (Fed), as well as nominate a Federal Reserve chair. The U.S. economy can likely handle whatever policy changes may come.
- The mysteries of U.S. medical costs: U.S. healthcare costs have risen rapidly over several decades. Third-party payers have separated healthcare consumers from the cost of healthcare, and advances in medical science have dramatically increased demand. The future is more of the same.
Weekly economic wrap
The robust synchronized global economic expansion continues unabated and will persist well into 2018. The upturn began in early 2016 after the U.S. dollar peaked and commodity prices troughed, and has accelerated every quarter since. It may still be picking up a bit of steam in the United States and the Eurozone. The economy in Japan is just past peak momentum, while growth in China is decelerating a bit from the super-fast pace of the second quarter.
U.S. reports stay spectacular even with the destruction from Hurricanes Harvey, Irma, and Maria. Purchasing manager indices from the Institute for Supply Management for manufacturing and service companies reached the best levels since May 2004 and August 2005, respectively. September light vehicle sales were a huge annualized 18.5 million, the highest since July 2005, likely aided by hurricane damaged purchasing. Factory orders and shipments remain strong, so the investment surge persists. Initial claims for jobless benefits have fallen back to more normal levels, indicating the hurricane ravaged regions of Texas and Florida must be recovering. The 12-month total of layoff announcements is the lowest since October 1997. The trade deficit is shrinking a bit and will add to growth this quarter. What’s not to like?
Bad headline; great details:
The labor market is tightening, even if the headline of Friday’s payroll report was a real bummer. It showed a September loss of 33,000 jobs, while job gains in July and August were revised lower by 38,000, ugly indeed. But, underneath that header, the details revealed a healthy job market. The unemployment rate fell two tenths to 4.2%, the lowest in nearly 17 years. And that’s happening even with new workers pouring back into the labor force and getting jobs after having been out of the workforce for months or years. In September, a record 4.9882 million newly employed workers came from “out-of-the-labor force,” a group labeled by the Bureau of Labor Statistics as neither employed nor unemployed.
Perhaps the best news on “payroll Friday” was a nice 0.5% rise in average hourly earnings, which is up over 2.7% on a smoothed basis from the prior year. This is the best progress since the financial crisis. The big hurricane-aided drop in low-wage workers in leisure and hospitality helped propel the gain, but the trend was picking up anyway.
U.S. wage growth is on the verge of breaking out of its lackluster trend:
- Profits are strong.
- Capital spending is picking up.
- The job market is excellent.
- Consumers and businesses seem to be shrugging off the lethargy, fear, and caution of the near decade of economic malaise through mid-2016.
So, it’s possible the U.S. economy is moving to a higher plane of growth. We expect two or more quarters of 3% plus growth, before a deceleration late next year.
The Fed says it’s December
That is the timing, Fed officials suggest, for the next hike in the fed funds rate. There was surely nothing in the payroll report or other world data to hint any differently. The Fed’s large portfolio of bonds will start its ultra-slow roll-off in October, so the U.S. central bank is on the path to more normal monetary policy. The Fed is not alone. The Bank of Canada has already raised rates twice and the European Central Bank will likely reduce its pace of bond purchases in January. Yields on 10-year German bunds have already doubled to 0.45% or so, and will likely move higher into year-end.
President Trump has several open positions to fill on the Federal Reserve Board, as well as a decision on Fed chair after Yellen’s term ends next February. Bloomberg reports that Yellen is in the mix to be reappointed. Another potential chair is current Fed governor Jerome Powell, who, along with Yellen, would offer continuity and market applause. Two others, former Fed governor Kevin Warsh and Stanford University economist John Taylor, author of the eponymous “Taylor Rule” for setting the fed funds rate, would likely bring faster rate hikes and perhaps more market volatility. Randall Quarles was recently confirmed as Fed governor and will join the more hawkish side. The U.S. economy will handle higher interest rates just fine, at least for a while.
The mysteries of U.S. medical costs
Few public topics generate as much debate as healthcare. It’s important to each of us personally and to society broadly, but when specific questions arise of how much is spent, who funds the expenditures, what the money buys, or how fast the spending has grown, the comments become vague. 2015 is the most recent year for which detailed numbers are available. That year, U.S. healthcare spending rose 5.8% over the prior year to reach $3.2 trillion, $9,990 per person, 17.8% of gross domestic product (GDP).1 The expansion in coverage mandated by the Affordable Care Act (ACA) of 2010 became fully effective in 2014, and the annual growth of healthcare spending jumped to 5.3% from only 2.9% in 2013, and an average of roughly 4% the prior five years. In 2015, healthcare expenditures were distributed as follows:
- Hospital care—32%
- Physician and clinical services—20%
- Prescription drugs—10%
- Government administration—7%
- Nursing homes, continuing care—5%
- Other residential and personal care—5%
- Public health initiatives—3%
- Home healthcare—3%
- Other professional—3%
- Medical equipment—4%
- Investment in medical facilities—4%
Who paid for these expenses in 2015?
- Private health insurance—33%
- Medicaid: federal and state—21%
- Patient out-of-pocket—11%
- Other government third-party payers and public health initiatives—11%
- Government investment—5%
Both the sources of funding, and the cost of healthcare, have changed dramatically over time. In 1960, 52.2% of healthcare spending was paid by patients “out of pocket,” and another 30.4% by private health insurance. Medicare and Medicaid didn’t exist, so the government sources were the Veterans Administration, Indian Health Service, assorted children’s health programs, mental healthcare, and general assistance funding. In 1965, Medicare became law and created an insurance program for the elderly, and Medicaid was established, a health program primarily for the elderly poor.
Healthcare coverage expanded rapidly after 1965 when Medicare and Medicaid benefits grew, and businesses created generous health plans for employees. By 2000, the portion of health outlays funded by patients “out of pocket” shrank to 15.4%, the share funded by the federal government soared to 33.1%, and private insurance funded 35.6% of costs.
The surge in U.S. medical spending over time has been astounding. Expanding coverage by insurance and government had the effect of separating healthcare consumers from its cost. Since consumers have never seen the true cost of healthcare, they began to view it almost as a free good. This increased the demand for healthcare, while dramatic advances were made in medicine and medical procedures. So, the growth of national healthcare costs was a huge 9.2% annually, between 1960 and 2015. Expenditures per person grew from an incredibly low $146 per person in 1960, to $4,857 in 2000, and $9,990 in 2015. Healthcare spending was only 5.0% of GDP in 1960, soaring to 13.3% in 2000, and 17.8% in 2015.
What lies ahead?
Higher costs. The Center for Medicare and Medicaid Services (CMS) estimates that healthcare spending will continue growing near its recent pace of 5.8% per year, through 2025. The CMS also assumes medical inflation will rise from a historic low of 0.8% in 2015, to 3% per year in 2017, and through 2025. While the total U.S. population is growing about 0.9% per year, the population 65 years and over may rise 3% annually, and reach 16.3% of the population in 2020, from 14.6% in 20152. The population under 65 years of age will grow just 0.5% over the same period. With the insured share of the population rising from 91.0% to about 91.5% by 2025. National health spending is forecasted to reach 18.9% of GDP by 2020, and $12,489 per person.
The CMS assumes the ACA will be the “law of the land” through 2025, so it forecasts that healthcare spending will keep rising through that period. What kind of changes might arrest the spiraling cost of U.S. healthcare? Several come to mind. If insurance companies could sell insurance across state lines and high-deductible policies were available, consumers could choose policies tailored to their income and desires. All these may help. But, even so, natural consumer demand for the best healthcare, along with robust U.S. innovation and advances in medical science that promise new cures and treatments, will likely keep pushing healthcare costs higher.
1National Health Expenditures 2015 Highlights, Centers for Medicare & Medicaid Services, https://www. cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/highlights.pdf
2 Data is from the United States Census Bureau