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Home Publications Blogs Beat the Press The Secret of the First Quarter Health Care Spending Slowdown

The Secret of the First Quarter Health Care Spending Slowdown

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Friday, 11 July 2014 04:55

Floyd Norris had an interesting piece noting the incongruity between the relatively strong job growth we saw in the first half of 2014 and the near zero or possibly negative GDP growth for the period. (First quarter growth was -2.9 percent, second quarter growth will be positive, but quite possibly less than 2.9 percent.) While it is easy to explain the drop in first quarter GDP as an anomaly driven by falling inventories and bad weather, it is still difficult to reconcile with a rate of job growth of 230,000 a month.

At least part of this story is likely due to quirks in the data. One prominent quirk that has been overlooked has been the pattern of health care spending. Much has been made of the fact that spending on health care services fell in the first quarter, something we have not seen since the 1960s. While this drop is striking, it is somewhat less so when we look at the fourth quarter data.

The Bureau of Economic Analysis (BEA) reports that nominal spending on health care services rose at a 7.6 percent annual rate in the fourth quarter of 2013. This is almost twice the average pace for the prior two years. (I use nominal since I think "real" spending is of questionable meaning in health care. If we are given more of a drug that has no beneficial effect or have more unnecessary tests or procedures, real spending will increase. If better research ends this spending, it appears as a reduction in real spending even if this might be associated with better health.)

Taken on their face, the BEA numbers show a big surge in health care spending in the fourth quarter followed by an almost unprecedented reduction in spending in the first quarter. We could believe that this accurately describes what happened in the economy, or alternatively we can believe that the fourth quarter number overstated the actual increase in spending. I would lean toward the latter view. The data are never perfect and by definition, any overstatement in spending growth in one quarter leads to an understatement of growth in the next quarter.

Anyhow, that's my story on health care spending. But the GDP growth data and the jobs data are still seriously out of line.

 

Comments (4)Add Comment
The Fear Factor?
written by Robert Salzberg, July 11, 2014 8:49
Many people get elective procedures, tests, and surgeries in the 4th quarter partially because they have already met their deductibles.

I strongly suspect that the significant percentage of Americans that believed that the actual implementation of the ACA would cause a train wreck in our health care system pushed up spending in the 4th quarter last year which was balanced by a drop in the first quarter of this year as the same people avoided engaging the health care system out of fear or didn't need much since they got in done in the 4th quarter.
The Fear Donkey?
written by Jay, July 11, 2014 11:31
BEA figures are SAAR. That stands for Seasonally Adjusted Annualized Rate. Seasonal spending in health care is already accounted for. So your hypothesis is wrong. If you understood the data you woudn't make statments that make you look like an ignoramus.
...
written by jjmsan, July 11, 2014 1:06
If you have a flex account for medical spending, you need to spend the money by year's end or you lose it. Also, what you could buy with those accounts was changing in the new year.
Final sales are better than GDP
written by Doug Rife, July 11, 2014 9:44
What's been overlooked is that inventories added to GDP in almost every quarter of 2013. Since inventories cannot grow without limit and must track final sales over the long term it should have been expected that inventories would fall in Q1 2014 and subtract from GDP. Also remember that GDP is seasonally adjusted so that weather that is unseasonably worse than usual will throw off this quarterly adjustment.

Year-over-year real final sales of domestic product (shown in the chart below) avoids the inventory distortions and seasonal adjustment problems of quarterly GDP figures.

Real final sales fell below 2% way back in Q1 of 2013 but this went largely unnoticed due to all of that inventory building during 2013.

I also include real final sales to domestic purchasers, which is a measure of domestic demand that excludes exports. Both series clearly show the slowdown in demand growth since Q1 2013. The most recent value for Q1 2014 is 1.5% year-over-year final sales growth. That's 5 quarters in a row below 2%!

http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=FqH

Secular stagnation is also visible in the long term decline in demand since peaking at over 5% in 1999.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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