Today’s post is rather short by comparison to others. It is an adjunct to yesterday’s post regarding the credit market status for senior living and post-acute providers. Readers/followers that read the post will note that I included a fair amount of economic discussion, including some Federal Reserve minutes, to frame where I think rates and credit markets are likely to head. Lending trends are directly tied to economic conditions and of course, connected tightly to Federal Reserve monetary policy. For reference, yesterday’s post link is here: https://rhislop3.com/2024/02/28/wednesday-feature-lending-trends-still-reflecting-a-tight-capital-environment/
A key data point or indicator that I follow, among many such as CPI, PCE (mentioned in yesterday’s post that it would come in a bit hotter and today’s release, it did. Core (minus food and energy) came in at .4% for January. Annualized, that is a bit over 5%), is consumer confidence or consumer sentiment. Consumer behavior or consumption equates to approximately 60 to 66% of the economic activity in the U.S. (measured via GDP). Consumption decisions are heavily influenced by the cost of money as larger item spending including buying homes, is a function of the cost of money (interest cost). If consumers are sour on their consumption due to rising costs of money, purchases of cars, household appliances, home improvements, etc., fall off or are delayed. Instead, consumption shifts toward services and in some cases, simply to necessities. The housing market is an example of how consumers react to rising money costs. Sales are way down yet prices are up (scarcity).
OK, so some (or maybe many) readers are thinking, “what does this have to do with health care?” Simple, as goes the economy, so goes health care to a certain extent. Yesterday’s post was indicative of how interest rates and capital access impacts senior living/senior health care providers. Hospitals face similar circumstances. Consumers also face challenges and in turn, will consume less care if forced to make financial decisions and/or, pay more slowly or in some cases, not at all. Worse, consumers with health plans with higher deductibles and co-pays, tend to avoid care, especially preventative care, until shear medical necessity kicks in, typically at the point, where higher cost care is required. Choices are made, and arguably, influenced by the cost of money (interest rates).
Yesterday, doing some sorting and reading, I ran across a fascinating article primarily written by Larry Summers. Summers is an economist, a past president at Harvard, former Secretary of the Treasury (Clinton) and former head of the National Economic Council (Obama). The piece he co-wrote with Marijn A. Bolhuis (International Monetary Fund), Karl Oskar Schulz (Harvard), and Judd N. L. Cramer (Harvard) was published by the National Bureau of Economic Research. The title is “THE COST OF MONEY IS PART OF THE COST OF LIVING: NEW EVIDENCE ON THE CONSUMER SENTIMENT ANOMALY”.
The core of the paper is about the influence, in the opinion of the authors, of borrowing costs on consumer sentiment and ultimately, consumer behavior. The paper is here: w32163_240228_140313
Unemployment is low and inflation is falling, but consumer sentiment remains depressed. This
has confounded economists, who historically rely on these two variables to gauge how consumers
feel about the economy. We propose that borrowing costs, which have grown at rates they had
not reached in decades, do much to explain this gap. The cost of money is not currently included
in traditional price indexes, indicating a disconnect between the measures favored by economists
and the effective costs borne by consumers. We show that the lows in US consumer sentiment
that cannot be explained by unemployment and official inflation are strongly correlated with
borrowing costs and consumer credit supply. Concerns over borrowing costs, which have
historically tracked the cost of money, are at their highest levels since the Volcker-era. We then
develop alternative measures of inflation that include borrowing costs and can account for almost
three quarters of the gap in US consumer sentiment in 2023. Global evidence shows that
consumer sentiment gaps across countries are also strongly correlated with changes in interest
rates.
Back to healthcare stuff, health policy stuff, etc., tomorrow. Happy TGIF eve!