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.
KEY TAKEAWAYS
- Employment growth in January and February is estimated at over 250,000 jobs per month, faster than any period in 2017
- Employment growth overall is projected to rise slightly to 2.0% throughout 2018 before falling in 2019
- The unemployment rate has held steady at a historically low rate of 4.1%
- Average weekly wages growth has been sluggish, but is forecast to be above 4% for this year and next year
- Medical inflation is expected to rise to 2.2% this year and to increase slowly in following years
- Both short-term and long-term interest rates have risen 0.3-0.4 percentage points in the past quarter and are forecasted to continue rising throughout the year and into 2019
EMPLOYMENT GROWTH
Private employment growth is estimated to be 287,000 in February and 238,000 in January after an increase of 174,000 in December 2017. This would be the largest three-month gain since late 2015, despite projections of slightly
slowing employment growth. The biggest sector gain was in construction, which added an estimated 61,000 jobs, the best month since 2007.
The unemployment rate has remained at 4.1% for five consecutive months, so even with healthy job growth, the labor market continues to be tight. Moody’s now forecasts employment growth to increase slightly to 2.0% in 2018 before declining in 2019. This forecast expresses two countervailing forces at work in the labor market. Jobs reports continue to be good and labor force participation has risen slightly, marking stable employment growth. But at the same time, demographic trends and low unemployment suggest that growth must slow down before too long.
Real gross domestic product (GDP) grew at the seasonally adjusted annual rate of 2.9% in Fourth Quarter 2017. This is a slight decline from the second and third quarters, but still well above the annual growth level of 1.5% in 2016. Consumer spending rose 4.0% at an annualized rate, but rapidly increasing imports brought down final GDP growth. (Imports are subtracted from total spending to obtain domestic production.) Exports increased in the fourth quarter as well, but by a lesser amount.
WAGE GROWTH
Employment growth continues to outperform expectations, but wages have yet to catch up with forecasts earlier in the year that called for wage growth to accelerate above 3% during 2017. Moody’s most recent forecast is for average weekly wage growth during 2017 of 1.5% (final data is not yet available), while preliminary estimates from the Bureau of Economic Analysis indicate 1.7% estimated wage growth. A final figure for 2017 anywhere within the range of 1.5–2.0% will be an improvement over 2016, but well below Moody’s projections of 4.2% wage growth in 2018 and 4.9% in 2019. The reported 2018 forecast has held steady from the last two
Quarterly Economics Briefings (QEB).
In last December’s
QEB, we discussed the idea that low overall wage growth may be a combination of rising wage growth for the continuously employed, which is to be expected in a tight labor market, muted by employment inflows of weakly attached, lower paid workers. This combination would produce stronger-than-expected employment growth, but weaker wage growth. In other words, rising wages for
existing workers might be masked by
new workers coming into the job market at lower wages. Then, if the pool of new entrants dries up, overall wage growth can be expected to accelerate. As of late 2017, wages to continuously employed workers were rising, making this a plausible explanation. However, the most recent data shows that annualized wage growth for continuously employed workers fell in the past several months, from a high of 3.6% last September to 2.9% in February, casting doubt on this hypothesis. It remains to be seen whether wage growth in 2018 will match optimistic forecasts.
MEDICAL INFLATION
The Centers for Medicare & Medicaid Services (CMS) projects the Personal Health Care Deflator (PHC) to grow at 2.2% this year and 2.4% in 2019. CMS further projects the PHC to continue to rise slowly through the early 2020s, reaching 2.8% by 2025. This projected growth, more than one percentage point higher than medical inflation has been in the past several years and comparable to medical inflation in the mid-2000s, would be an important driver that could increase long-term medical expenses paid by workers compensation.
INTEREST RATES
In our last issue, we discussed the flattening of the US Treasury yield curve. During 2017, short-term interest rates, such as the 2-year Treasury rate, rose by over half a percentage point. But the long-term interest rate, such as the 10-year Treasury rate, stayed flat or even declined. At the end of the year, those respective rates were 1.89% and 2.40%.
The shape of the Treasury yield curve has not changed much in First Quarter 2018, but rates have risen all along the curve. At the end of the quarter, the 2-year rate was 2.27% and the 10-year rate was 2.74%. Both increased between 0.3-0.4 percentage points in the new year. Higher nominal interest rates are consistent with higher expected inflation rates. Moody’s forecasts the Consumer Price Index to increase by 2.7% in 2018 and 2.5% in 2019, up from 1.3% in 2016 and 2.1% in 2017. Higher interest rates may also reflect expectations for slightly higher future economic growth resulting from increased employment.
Both short-term and long-term rates are forecasted to continue to rise. On March 21, the Federal Reserve Board raised the federal funds rate by a quarter point, and is expected to raise it again as many as three more times this year. Short-term interest rates usually track the federal funds rate very closely. While longer term interest rates are less closely aligned, Moody’s forecasts higher rates on 10-year Treasury notes as well—up to 3.2% in June of this year and 4.0% in June of 2019.
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