Medical Device Production Still Growing Faster
Even though medical care spending has grown at a decelerating rate since late 2015, in August it was still growing at its fastest rate since late 2002. However, premium increases for many plans that are part of the Affordable Care Act were announced just before this column was written. The increases have been significant, and the ACA has come under fire from many as being unaffordable and broken. This column is being written just before the election, but even after November 8, there will be quite a bit of uncertainty in regards to future health care policy. This has the potential to dampen new capital investment in the medical equipment and device industry until the regulatory environment becomes more clear.
Despite all of that, the strong growth in medical care spending has led to rapidly accelerating growth in medical equipment production. The annual rate of growth is the fastest since late 2013 and the second fastest since early 2009. I expect the rate of growth to continue to accelerate through at least the end of 2016.
Also, Gardner Business Media’s medical business index has been a mixed bag in 2016. The index has swung wildly between growth and contraction. From September 2015 to July 2016, the index was trending up overall. However, the index has dropped three straight months and broken down through the previous uptrend.
Automotive Spending Expected to Pick Up
The real 10-year treasury rate was 0.70 percent in September, falling below 1 percent for the fourth month in a row and reaching its lowest level since February 2015. Since the Fed announced it was raising its overnight rate, the real 10-year treasury rate has dropped each of the last 10 months. A significant reason for this is that the rate of inflation, while still low historically, has picked up from what it was in 2015. In September, the annual rate of inflation was the highest since October 2014, according to the Consumer Price Index. The year-over-year change in the real rate (the real rate is the nominal rate minus inflation) fell to -115 basis points. That was the fifth consecutive month that the year-over-year change declined at the fastest decline since July 2012.
The recent trend in the interest rate indicates an upturn in real motor vehicle and part spending. After contracting two of three months from March to May, real motor vehicle and part spending grew each month from June to August. This indicated that the annual rate of change has bottomed and should grow at an accelerating rate in response to the decline in the real 10-year treasury rate. However, the growth rate in spending in August was virtually the slowest since early 2010. Therefore, it is likely that there will need to be significant growth in spending before motor vehicle and part production returns to accelerating growth.
Some good news for moldmakers is that new vehicle launches are still projected to be quite high in the upcoming years, which should equate to an increased need for new molds.