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 2017 and projected growth for 2018 are holding at just under 2%, and the unemployment rate has continued to decline to a historic low below 4%.
- Estimated wage growth bounced back to 3.4% in 2017 (from 1.2% in 2016), similar to growth rates during 2014–15 and above earlier projections for 2017. Wage growth is expected to increase further in 2018 and 2019.
- Medical inflation is expected to increase from 1.4% in 2017 to above 2% in 2018 and is projected to continue to rise in 2019.
- Short-maturity interest rates rose 25 basis points, and long-maturity interest rates rose 11 basis points in the last three months. This has continued the flattening of the yield curve observed over the past year.
EMPLOYMENT GROWTH
Employment growth has held steady in recent months. The Bureau of Labor Statistics (BLS) reported an increase of 155,000 jobs in March and preliminary estimates of 159,000 and 223,000 in April and May.
Private employment growth for 2018 is forecasted to be 1.9%, a tiny increase over 2017. However, employment growth is expected to decline to 1.5% in 2019. Long-term trends suggest employment growth will lessen in the next several years as the growth rate in the working age population declines. Last fall, the BLS projected annualized employment growth of just 0.7% over the 10-year period from 2016 to 2026.
The unemployment rate dipped below 4% in April and was measured at 3.8% in May. It last reached 3.8% in 2000 and has not been lower since 1969. The seasonally adjusted U-6 rate, which also counts marginally attached workers and those employed part-time for economic reasons as underutilized workers, stands at 7.6% and shows the same pattern of steady decline and historically low levels as the headline unemployment rate.
Real gross domestic product (GDP) grew at the seasonally adjusted annual rate of 2.0% in the first quarter of 2018. This was lower than the previous quarter and slightly below the overall 2.3% change in 2017. The largest downward force on GDP growth, relative to previous quarters, was the relatively small increase in personal consumption expenditures. Adjusting for seasonality, consumers spent nearly $16 billion less on motor vehicles and parts in Q1 2018 than in Q4 2017, accounting for a –0.3% change in GDP and driving the first quarterly decline in years in consumer goods spending. Lower consumption expenditure was offset, in part, by high private domestic investment. Nonresidential investment growth was above-average across the board, with quarterly investment growth in structures, equipment, and intellectual property products all exceeding 2017 averages.
WAGE GROWTH
Based on the most recent data, average weekly wage growth for 2017 was 3.4%. After dropping to 1.2% in 2016, wage growth last year rebounded to the 3% range experienced in 2014 and 2015. In addition, 3.4% actual wage growth for 2017 is a substantial increase over projections in prior issues of the
QEB. The bump up was mainly due to an unusually large increase in wage growth, as reported by the BLS in its most recent Quarterly Census of Employment and Wages in comparison to wage growth estimates from other sources that were used in our earlier
QEB projections.
Wage growth is projected to increase to 3.9% in 2018 and 4.7% in 2019, in part because of low unemployment and slow growth of the labor force, as discussed in the previous section. Although wage growth above 3% in three of the last four years is a slight increase over the early 2010s, a critical open question is: Why has the continuing decline in unemployment and long economic expansion not led to even
higher wage growth? Despite optimistic projections in recent years, present wage growth has still not approached pre-recession levels, even as the economy has reached historic lows in the unemployment rate.
One possibility we discussed in previous issues was that low-paid new entrants to the workforce may be masking high wage growth for experienced workers. This hypothesis fit the data when wage growth for the continuously employed exceeded overall wage growth, as was the case in 2016. However, higher overall wage growth in 2017 did not lead to higher wage growth for continuously employed workers. The newest wage growth produced by the Atlanta Fed is 3.2%—close to the wage growth in the same series for 2016 and 2017. Experienced workers are
not currently enjoying particularly high wage growth.
There are many other possible explanations for differences in wage growth from previous expansions. Observers often point to increasing automation and the decline in organized labor as long-standing downward pressures on wage growth. Another complementary hypothesis is that declining competition among employers has depressed recent wage growth compared to previous expansions in the US economy. If there are only one or two employers in an area that are hiring for certain occupations, such as database administrators, those workers will have a tough time bargaining for higher wages, even in strong economic conditions.
In a recent set of studies, economists have used online job postings to measure how much hiring in a variety of occupations is dominated by just a few firms. In their data, they show that
more than half of labor markets in the United States meet the definition of “highly concentrated” by DOJ/FTC guidelines,1 meaning there are relatively few firms competing for workers. This is especially common in smaller cities and more rural markets. They also show, unsurprisingly, that
less competition for labor leads to lower posted wages.2 These studies are limited by the need to use only online postings. But their results provide interesting preliminary evidence that current high levels of labor market concentration may be a contributing factor to more measured wage growth in recent years than in previous expansions with similarly low unemployment.
MEDICAL INFLATION
Starting last year, NCCI began to measure medical inflation using the Personal Health Care (PHC) deflator produced by the Centers for Medicare & Medicaid Services (CMS). (Our reasons for adopting the PHC deflator are presented in the
3rd Quarter 2017
QEB and in an
NCCI research brief.)
The PHC is published and its projections are updated only on an annual basis. For this reason, we supplement our PHC chart with historical and projected changes in growth rates for the healthcare component of the Personal Consumption Expenditures (PCE-HC) price index. The PCE-HC is produced by the Bureau of Economic Analysis using a similar design to PHC and is updated quarterly, which can make it a useful indicator of PHC growth. The series use different data sources to weight categories of medical expenditures, but there is a very close match between their measured growth rates, as shown by the gray dots representing PCE-HC growth for 2013–17.
The PCE-healthcare growth rate in 2017 was 1.4%, a mild increase over 2016 and identical to the projected growth rate for PHC for 2017. (The 2017 PHC data is projected because its weights are generated from National Health Expenditure data that is not yet final.) Both measures are projected to grow more than 2% in 2018 and grow slightly faster in 2019. Moody’s Analytics’ current projections of 2.6% and 3.1% in 2018 and 2019 for healthcare PCE are higher than CMS’ 2.2% and 2.4% projections for 2018 and 2019 PHC growth, which were produced in February. Despite the differences in timing and methodology that produce different figures, the measures agree that medical inflation will rise significantly in the next couple of years. One contributing factor to rising medical costs is hospital consolidation, a topic we discuss in the Drilling Down section of this
QEB.
INTEREST RATES
As they did last quarter, both short- and long-maturity interest rates have risen in the last few months. The 10-year Treasury rate ended the quarter at 2.85%, 11 basis points above the corresponding rate at the end of March. The 2-year Treasury rate has increased to 2.52%, a 25-basis-point increase in the same time period. This differential is in the same direction as the pattern observed since 2017: Short-maturity rates have risen faster than long-maturity rates, flattening the yield curve. The difference between the 10-year and 2-year Treasury rate has dropped from 0.93% to 0.33% since last June. This fits the general pattern of larger increases in rates at short maturities. Treasury rates at all maturities less than five years have risen about a full percentage point since last June, but 10-year rates have increased only about 0.5% and 20-year rates by 0.3%.
Multiple factors have contributed to this shift. Recent raises in the federal funds rate, including at the most recent meeting on June 13, increase yields on short-maturity bonds but do not directly impact rates for bonds with longer durations. Relatively higher prices, and thus lower yields, on long-term bonds have also come from high demand from foreign investors and pension plans. Analysts have noted that for pension plans in particular, some of this demand is likely temporary. That’s because pension contributions can be deducted at the previous (higher) 35% corporate tax rate through September 2018. So this damper on rates may end very soon.
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.
These explanations suggest the observed flattening yield curve may be a cause for concern but not yet for alarm. While an inverted yield curve, in which rates on long-maturing bonds are below rates at shorter maturities, is regarded as a leading recession indicator, a tightening of the yield curve has not
always been historically followed by an inversion. There are good economic explanations for the current patterns and reason to believe the shape of the yield curve will stabilize soon.
Indeed, Moody’s forecasts interest rates for both short- and long-maturity Treasuries to rise similarly to one another over the next year. The Federal Open Market Committee participants are almost evenly divided between those predicting a federal funds rate one quarter point higher or less at the end of 2018 and those predicting a rate two or more quarter points higher, suggesting one or two more raises in 2018. Committee participants expect two or three additional raises in 2019. This will continue to put upward pressure on interest rates for short-duration bonds, as the federal funds rate will likely be 0.75–1.00% higher by June 2019.
Long-maturity interest rates are also projected to rise. Moody’s forecasts the 10-year Treasury rate to increase by almost a full point to 3.9% by June 2019. This is consistent with increasing inflation and the expected growth in wages discussed in the sections above, as well as a predicted dip in demand as tax incentives expire. This would roughly hold the shape of the yield curve constant over the next year.
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