Medical equipment output remains strong despite drop

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The Federal Reserve Board’s monthly index that measures U.S. industrial production of medical equipment and supplies registered 120.8 in April (in 2002, it was 100).

This value was down slightly from the previous month, but it represented a gain of almost 6 percent from the same month a year ago. For the year to date, the total U.S. output of these products is up 4 percent from the comparable period in 2013. I expect this pace of growth will be sustained through the second half of this year, and my forecast for 2014 as a whole calls for annual growth of 4 percent in the total U.S. output of medical equipment and supplies when compared with last year.

If this forecast proves true, then it will be just another “average” year for this industry.

Since the beginning of the new millennium, U.S. production of these products has enjoyed an average annual growth rate very close to 4 percent per year. And if you are thinking that 4 percent per year doesn’t seem all that remarkable, consider this: over the same time, the total U.S. GDP posted average growth of less than 2 percent per year; the stock market escalated by less than 3 percent per year; and the total population of the U.S. expanded by an average rate of less than 1 percent per year.

The average rate of growth for the U.S. plastics industry during this time was a decrease of 0.7 percent per year. So a 4 percent average growth rate over the long term seems pretty good to me.

But despite this solid average, there is still some cyclical variation in the pace of growth from year to year. Processors who supply this industry should consistently monitor these changes in the growth rate as part of their internal planning and forecasting efforts because the variations tend to track in a predictable trend over the course of the cycle.

To illustrate the changes in the momentum of the production levels, I have included a 12-month rate of change chart derived from the Fed data on monthly output (above). Keep in mind that this chart does not show the actual levels of output, but rather the rate that these levels are changing over time.

This chart is enlightening because it shows that there are some cyclical factors affecting this industry that are not entirely dependent on the prevailing economic fundamentals. Output levels of medical supplies did decelerate during both of the major economic recessions the U.S. experienced during this time period (2001 and 2009), but there were also some periods of deceleration in production levels during periods of overall economic growth. And there were also periods of strong acceleration in the production levels of medical supplies during times when the overall economy was not growing at a particularly robust pace (2008 and 2013).

This unusual cyclicality notwithstanding, the good news is that the production levels of medical supplies do not drop very far during their cyclical troughs — never more than 1.4 percent on our chart — and the recovery phase tends to develop very quickly.

Based on this data, I cannot say that demand for medical equipment and supplies is recession-proof, but it is clearly less negatively affected by economic recessions than most other industries that I track and forecast. Demographic factors dominate the long-term outlook, but this industry is also affected by factors such as changes in technology, changes in regulatory policy, and the outbreak (real or perceived) of epidemics.

The biggest factor affecting the forecast of the medical industry in the near-term is the Affordable Care Act. As consumers, and as a society, we tend to prioritize medical products quite highly. Economists would say that there is little elasticity of demand for medical products.

And while this may be a noble idea, it has had the practical effect of pushing the cost of health care ever higher. This represents the biggest long-term threat to the industry because as medical costs have escalated, we have increasingly relied on political solutions to address our nation’s health care problems rather than market-based solutions. Personally, I have greater faith in free-markets than I do in Congress. But that is not the reality at the moment, so I will do my best to report faithfully what happens, good or bad.

It is too early to tell whether ACA will be successful in solving some of these problems.

On the one hand ACA could be a boon to the medical supplies industry because it expands access to medical products to a huge segment of the population that was previously not consuming as many of these products as they might have wanted. On the other hand, it is a giant political experiment that might end up harming our overall economy more than it helps.

But regardless of what happens with ACA, it must be said that the prosperity and expansion in the medical equipment and supplies industry would not have happened without the plastics industry.

The public at large may think that the gains in the medical and health care industry are the result of major breakthroughs that come from advancements in electronics and high-tech, and this is true to a large extent. But a lot of the steady expansion in health care is due to the fact that the plastics industry can supply a large volume of sterile and reliable equipment and supplies at a relatively low cost. Plastics really do make it possible.

All of this bodes well for the plastics processors that supply this industry. Unless something happens that is unforeseeable at the present time, global demand for medical equipment and supplies will continue to expand at a vigorous rate. In the industrialized nations such as the U.S., the populations are growing slowly but they are also getting older. These markets will increasingly demand products that are reliable, inexpensive and easy to use. In the developing economies overseas, the demand will be for products that are cheap, easy to ship, easy to store and resistant to contamination.

It is a fact of life on this planet that the human race is growing in number, and more people mean more disease, more war and even more natural disasters. All of this generates greater demand for medical equipment and supplies. Greater use of plastics in the manufacture and packaging of these products is our only hope of meeting this demand.

Bill Wood is economics editor for Plastics News, and is the founder and president of Mountaintop Economics and Research Inc.