• Good News on Health-Care Spending Is Making U.S. GDP Look Bad

    Posted on July 29, 2014 by in Breaking News

    Life Insurance, Medicare, CJB InsuranceBloomberg Businessweek by Matthew Philips and John Tozzi –

    June 25, 2014:

    The U.S. economy shrank 2.9 percent during the first quarter, the biggest decline since early 2009’s free-fall in the midst of the Great Recession.

    The decline in GDP is nearly three times worse than the U.S. Commerce Department predicted a month ago and nowhere near the first forecast made in April showing that GDP increased 0.1 percent. But this is the third and final forecast of first-quarter GDP-it’s now officially in the books.

    As the estimates of first-quarter growth kept getting worse, expectations for the second quarter have improved. In April, economists surveyed by Bloomberg were predicting second-quarter growth to come in at 2.8 percent. Now they’re expecting 3.5 percent.

    The big surprise in the first quarter was the dip in health-care spending. The U.S. spent $6.4 billion less on health care in the first quarter than in the last quarter of 2013. Government statisticians initially forecast a 9.9 percent increase in health-care spending-and what we got was a 1.4 percent decline. Considering all the millions of previously uninsured people who are gaining access to health insurance under the Affordable Care Act, how can they be shrinking so dramatically?

    Health-care costs overall have been increasing more slowly in recent years compared with the pace before the 2007-09 recession. Slow growth in the price of health-care services combined with a decline in utilization-the amount of health care people consumed-in the first quarter. So lower costs and greater access translated into lower consumption. That’s a head-scratcher.

    Some people saw this big revision coming, based on the method the Bureau of Economic Analysis uses to make its estimates, as Austin Frakt pointed out on the Incidental Economist blog last month. To estimate the effect of Obamacare in the first quarter, the BEA initially relied on trends in Medicaid spending, because it could not directly capture spending by people newly enrolled in private insurance.

    Still, health-care spending is expected to accelerate again in coming quarters “as the millions of people who gained health insurance coverage during the Affordable Care Act’s first open enrollment period begin to use their new coverage,” Jason Furman of the Council of Economic Advisers wrote Wednesday morning. Many of them got insurance at the very end of the first quarter-which could set the stage for an increase in health spending later in the year. Either way, it’s clear that with all the changes Obamacare has caused, statisticians are still trying to figure out how to model health-care consumption.

    The two other big drags on growth were private-sector investment and trade. Together they sapped the economy of 3.5 percentage points of growth. The investment story isn’t terribly surprising, and one we’ve covered fairly thoroughly. It goes like this: Businesses, spooked by economic and regulatory uncertainty (not to mention congressional high jinks), have chosen to hold on to cash rather than invest it in new equipment. Until recently, the market was rewarding those companies that chose not to invest and punish those that did. That trend won’t last forever, and there’s evidence it’s starting to turn.

    Then there’s trade. Both exports and imports dragged down growth in the first quarter, meaning that the U.S. exported fewer goods and imported more of them. This speaks to the strange way that the GDP calculation treats imports. An increase in imports suggests a rise in domestic consumption, which was true last quarter. Personal consumption added 0.71 percentage points to growth. Yet a rise in imports shows up as a subtraction to growth in the GDP calculation. As for exports, the slowdown in the amount of stuff the U.S. sold to the rest of the world is more a function of global demand. The U.S. still has competitive pricing power compared with other countries, especially given the low energy costs that U.S. manufacturers are enjoying from the shale boom.

    Yes, the trade deficit widened in the first quarter, but historically-at least over the past 20 years-a growing trade deficit correlates with a growing economy. Bottom line: The first quarter is filled with some strange things. The economy slowed, but not for any reason that threatens the longterm prospects of this current recovery.

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