Healthcare Spending Up, Medical Production Down
Since the fall of 2013, healthcare spending has been growing at a rapidly accelerating rate. In August 2015, it increased 4.7 percent year over year and was growing at its fastest rate since early 2003. In fact, this rate of growth in healthcare spending was virtually the fastest rate of growth ever. According to the advance gross domestic product (GDP) report from the Bureau of Economic Analysis, healthcare spending accounted for nearly 30 percent of total consumer spending in the third quarter of this year.
Based on the trend in healthcare spending, medical device production should be growing at an accelerating rate, too, but it seems to have gotten out of sync with its historical cyclical pattern. In 2014, medical equipment production should have grown at a decelerating rate. However, I believe the roll out of healthcare through the Affordable Care Act caused medical device manufacturers to increase production in anticipation of higher demand. So instead of decelerating growth in production, there was accelerating growth in production. Now it appears that medical manufacturers are slowing production to bring it back in line with healthcare spending.
In addition to these trends, Gardner Business Media’s medical index shows that new orders and production at medical manufacturers have declined rapidly since March 2015, and because new orders have been relatively weaker than production, backlogs within the industry have collapsed.
MV&P Spending Likely to Slow in 2016
The real 10-year treasury rate was 1.86 percent in September, 15 basis points higher than it was the month before and the highest it has been since February 2011. This was the fifth month in a row that the year-over-year change in the real rate was positive and the eight month in a row that it had increased. The change in the rate was the highest it has been since April 2014.
The growth rate in consumer spending on motor vehicles and parts (MV&P) has been decelerating throughout 2015, and the trend in the interest rate indicates that such spending will see even slower growth in 2016. Production, however, has been growing at significantly faster rate than spending since 2010. Historically, this is quite unusual, so one should expect that the deceleration in production will be faster than the deceleration in spending to bring the two into a better balance.
One bright spot for moldmakers is that the number of new vehicle launches is very high, which means the demand for tooling in the automotive industry should remain strong even if production levels fall.