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Post-Acute and Healthcare News and Topics

Friday Feature: The Economic Realities

For the past two years, as the pandemic emergency waned, and the U.S. and the rest of the world moved back to a more normalized business and social condition, the fallouts of a mish-mashed pandemic policy (federal, states, local) became evident. School closures with virtual learning impacted kids and their education performance (falling performance on reading and math). Enormous governmental outlays and supports to the tune of trillions, revealed fraud (PPP), begat inflation, and assisted in dislocating millions of people from the workforce via subsidies (rent abatements, student loan payment abatement, enhanced unemployment, etc.). What we know is that short-term measures without a longer-term view of the resultant impacts, can lead to troubling economic times, and sometimes, the cure in terms of pain is worse than the original condition.

This morning, core inflation data was released, known as PCE (personal consumption expenditure). What we see is continued inflation above the Fed target of 2%. PCE measures personal consumption, removing volatile components such as food and energy. This report showed that inflation, minus food and energy, ticked-up in March and rested at 5% year-over-year. With energy such as gas on the rise, expect the CPI number with food and energy included, to continue to be at or above 6%. Here is this morning’s PCE release:

Earlier in the week, another key economic number was released – GDP or Gross Domestic Product. GDP data represents the growth rate of the economy as measured by the sum total of goods and services produced by economic activity. The first quarter number was 1.1%. This result is down from the prior quarter measure of 2.2%. GDP releases are initial and then adjusted, with adjustments typically moving the initial number down. With inflation running significantly above GDP 1.1% vs. 5% PCE and/or 6+% CPI, the economy is either in a state of or moving towards (quickly) a condition known as stagflation and perhaps, recession. Stagflation occurs when inflation runs considerably higher than GDP growth. Here is the GDP report:

So, what does this data translate into for the near-term outlook for the economy? Answer: More of the same struggles and perhaps, some additional challenges. Interest rates will continue to rise as the Federal Reserve is likely to add another .25% rate hike to its core borrowing rate (fed funds rate), now at 4.75 to 5%. This will push the rate to 5 to 5.25%. A traditional economic principle starts to become evident: Fed rates at or above the rate of inflation drive inflation via demand reduction, down. If as suspected, the core inflation driver is 5% or thereabout, a fed funds rate at 5% to 5.25% should significantly slow the economy and move inflation down. The problem is the lag in seeing the impact and whether, the impact will in turn, push the economy into recession.

For senior housing and post-acute care, the current economic conditions are problematic (kindly stated). Real wages are not yet, keeping up with inflation meaning staffing costs will continue to have upward pressures. Borrowing costs are now crazy high and yet, reimbursement rates are not keeping up in growth, with the increasing cost of capital. For debt that is variable, providers are getting a rude and frequent awakening with increasing index rates pegged to the borrowing costs on the debt – rates therefore, rising. I’m watching growing debt defaults for senior housing as expenses have risen, borrowing costs the same in some cases, while revenues are flat or modestly higher but in no way, keeping up with the expense increases. The result is margin reduction and of course, reduced cash flow, translating into lower levels of income available for debt (below covenants).

Here’s a quick snapshot of economic data and conditions to watch over the next quarter.

  • Bank capacity and willingness to lend. Credit is tightening and banks with deposit runs, are not capable of generating the same lending levels as before. This will hamper access to credit.
  • As I have written about before, a non-existent (or very, very sluggish) home sale market due to high borrowing costs turns real estate primarily illiquid. This is not good news for seniors seeking or needing to sell a home to move into a senior housing project. With occupancy rates still below pre-pandemic levels, CCRCs and other senior housing providers will likely continue to struggle to move occupancy up due to the housing market challenges.
  • Access to capital for capital improvements is a necessity for the senior housing sector. I expect a year of tough sledding in terms of capital access and thus, a creep-up in average age of plant with deferred maintenance being the driver (this year).
  • Mergers and Acquisitions will also slow (already down) due to higher costs of capital and economic uncertainty. This may mean, with fewer buyers/acquirers, some projects/providers fall into closure/bankruptcy.
  • If there is a bit of good news, it may come a bit later this year, in the labor market. The impact will not be on the clinical side but on the non-clinical side. Layoffs which are occurring, will accelerate if further demand reduction in the economy occurs. This will move people into situations where shifting industries for work occurs. In other words, fall-out in construction could beget maintenance staff (an example).

TGIF and Happy Weekend to all!


April 28, 2023 - Posted by | Health Policy and Economics, Policy and Politics - Federal | , , , , , , ,

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