The exhibits below are updated to reflect the current economic outlook for factors that typically impact workers compensation. Each exhibit also provides some context for the outlook, relative to the historical data. Forecasts are derived from Moody’s Analytics.
- 2017 and 2018 employment growth is expected to be lower than in recent years
- Low unemployment has not translated into faster wage growth
- Interest rates have increased this year and are expected to rise more in 2018
- Beginning with this issue, we will use the Personal Health Care (PHC) deflator to measure medical inflation
Private employment growth picked up in June and July after slow growth in the previous three months, adding more than 200,000 jobs each month. However, in August, the US economy added only 165,000 jobs. During August, the most jobs were added in professional and business services. Employment declined in information services.
Real gross domestic product (GDP) growth accelerated in the second quarter to a 3.1% seasonally adjusted annual rate, as compared with annual GDP growth of 1.2% in the first quarter. The acceleration in the second quarter was due to increases in consumer and government spending as well as private inventory investment. Moody’s expects that real GDP growth will average 2.2% for all of 2017, compared to 1.5% in 2016. Moody’s expects GDP growth to accelerate to 2.9% in 2018. These forecasts, published in early September, may not fully adjust for the effects of the recent hurricanes, but the Federal Reserve’s September statement noted that storm-related disruptions to economic activity are unlikely to have a significant medium-term effect on the economy.
Despite the modest acceleration in real GDP growth, Moody’s forecasts that employment growth will slow slightly to 1.7% this year from 1.9% in 2016. Moody’s expectation is that employment growth will remain at 1.7% in 2018. As a consequence of low unemployment rates during the last few years, a higher than usual proportion of new hires are likely to be new entrants to the labor force. The implications for wages are addressed in the next section.
Final average weekly wage data for 2016 is now available and shows that average weekly wages increased by 1.2%, down from a 3.1% growth rate in both 2014 and 2015. Average weekly wages are forecast to increase by 1.9% this year and to accelerate to 4.5% in 2018. Moody’s forecasts for total wages decreased this quarter for the remainder of 2017 and beyond, lowering the 2017 forecast for average weekly wages from the previous edition of the
Quarterly Economics Briefing (QEB).
Unemployment remains very low. August’s 4.4% unemployment rate marks six consecutive months that the unemployment rate has been between 4.3% and 4.5%. Low unemployment usually means greater competition for workers and, therefore, increased wages. It is not clear why recent lows in the unemployment rate have been slow to translate into wage growth.
One possibility is that a strong labor market brings in workers who are less attached to the labor force. These workers usually have below-average wages. This change in workforce composition would have a dampening effect on wage growth, as wage growth for the continuously employed would be partially masked by the addition of new, lower-wage workers. The ratio of employment to population, which simultaneously takes into account the unemployment rate and labor force participation, has increased faster since 2015 than would be expected from changes in the unemployment rate alone. This supports the conjecture that strong labor market conditions are pulling weakly attached workers into the labor force. Despite this effect, the forecasts suggest that upward wage pressure from continued low unemployment rates will lead to higher wage growth during the remainder of 2017 and into 2018.
Annual inflation in the medical Consumer Price Index (medical CPI) accelerated in 2016 to 3.8%, largely reflecting price increases for health insurance and physicians’ services. However, Moody’s expects the medical CPI’s rate of growth to slow this year to 2.7% before increasing next year to 3.2%. Both forecasts are down one-tenth of a percentage point from those reported in the June 2017
QEB. As discussed in that edition, this year’s slowdown in medical inflation, as measured by the medical CPI, is due to a slowing in the rate of price growth for prescription drugs. However, Moody’s still expects the medical CPI to increase at a faster pace than the general CPI, which is forecast to increase 2.0% annually both this year and next.
PERSONAL HEALTH CARE DEFLATOR
Beginning with this issue of the
QEB, we present the Personal Health Care (PHC) deflator as an alternative measure of medical inflation to the medical CPI. The Center for Medicare & Medicaid Services constructs the PHC deflator using different methodology than the medical component of the CPI. Forthcoming NCCI research shows that the PHC is more closely aligned with the mix of medical services experienced in workers compensation than the CPI.
There are two main causes for the differences in the price indices. Both causes stem from the fact that the CPI focuses on costs paid out-of-pocket1, whereas the PHC deflator uses price changes across all payers for key categories of medical spending, including hospital services and physicians’ services.
- By using all payers and different sampling, the PHC deflator measures lower price increases for hospital services and physicians’ services
- The weight on each spending category in the PHC is benchmarked to the comprehensive National Health Expenditures rather than the Consumer Expenditure Survey
In both areas of divergence, the PHC deflator appears to be a better match for workers compensation than the medical CPI. The medical CPI measures much higher inflation for hospital prices than the series used by PHC, and researchers have suggested this partially reflects self-pay consumers whose experience does not reflect price growth for workers compensation. Despite these pricing differences, the medical CPI puts less weight on hospital spending than PHC and more weight on prescription drug spending. Physician’s services weights are similar. Analysis of the NCCI Medical Data Call reveals that the PHC’s weighting better matches workers compensation.
How much does this matter? The PHC deflator has consistently estimated medical inflation lower than medical CPI. These differences between indices have ranged from 1.0 to 1.6 percentage points since 2012. This gap is a little high by historical standards, but the average difference in the two measures has averaged 1.0 percentage points since 1998. For long-tailed medical expenses, differences in projected levels and changes in inflation can compound to significantly change expected costs—medical inflation has increased 38% in the past 10 years by CPI compared with 25% by PHC.
PHC’s measured price growth is forecasted to be higher in 2017 and 2018 than it was in the last few years, rising to 1.6% and 2.3%, which would reverse a steady decline from 2009 through 2015. This pattern matches the general path of the medical CPI, but the measured decline in price growth occurred somewhat more smoothly in PHC. PHC category weights are updated every year, while CPI’s weights are changed biannually, which can lead to jumps in the medical CPI. One drawback of PHC’s methodology is that PHC price indices are only updated annually, with almost a full year’s lag. We estimate that the forthcoming publication of 2016 PHC price growth will be close to the projected value of 1.3%.
The Federal Open Market Committee (FOMC) decided during its September meeting to maintain the federal funds rate in the target range of 1.00%–1.25%. The target range for the federal funds rate had been increased by 25 basis points at both the March and June 2017 meetings. The Fed indicated in September that it will begin shrinking its asset holdings of Treasury and mortgage securities in October by allowing these assets to roll off without repurchases. The Fed’s projection following the September meeting also indicates that it may raise the target rate once more this year. The Fed’s statement about Hurricanes Harvey, Irma, and Maria also discussed short-term price increases due to items such as gasoline, but downplayed the possibility these would have lasting effects on inflation or Fed behavior.
The interest rates on the 10-year Treasury note was 2.2% in June, marking the fifth consecutive year that the June rate has been between 1.6%−2.6%. Moody’s expects the 10-year rate to rise to 3.1% next year, which would be higher than it has been since the middle of 2011. This is consistent with expectations expressed by most FOMC members that the federal funds rate will rise above 2.00% in 2018.
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Note: Analysis and charts prepared in August and September 2017.