Ebola scare, ACA could drive health care growth

I have raised my forecast for United States production of medical supplies and equipment. My new forecast calls for an increase of 6.6 percent in the total output of these products in 2014, and this will be followed by a gain of 7.5 percent in 2015. This forecast is based on a combination of both long-term trends and short-term factors that impact demand for medical products.

As the rate of change chart illustrates (right), the growth rate in the Federal Reserve Board's monthly data series that measures the production of medical supplies and equipment exhibited a consistent cyclical pattern in recent years. Keep in mind that this chart does not show the actual levels of output of medical supplies, but rather the rate at which these levels are expanding or contracting at any given time.

A closer examination of the chart reveals that the growth cycles in this data would usually last in the range of 2 to 3 years. The growth rate would typically peak around 6 percent in the stronger years and the troughs would bottom out around -1 percent in the weaker years. On average, this industry was expanding by about 4 percent a year. This was considerably faster than the growth rate in the overall economy and most other segments of the manufacturing sector during this time.

At the beginning of 2014, it appeared that the data had entered into another deceleration phase in the growth cycle just as it had done several other times in the past few years. The curve looked like it hit a cyclical peak of just over 6 percent in 2013, and the curve was clearly aimed lower in the first quarter of 2014. This does not mean that output levels were contracting at this time. It means that they were growing at an increasingly slower rate. During the first few months of this year, I expected that the cyclical pattern would continue to prevail and the rate of growth in 2014 would be moderately lower than it was in the previous year.

My expectations notwithstanding, production levels started to accelerate in the middle of this year when compared with the same months of a year earlier. In the third quarter, the output of medical supplies escalated by more than 7 percent when compared with the third quarter of 2013. The industry was gaining momentum.

Because of this, I now believe that the cyclical pattern of the past few years will not hold, and we are now entering a new trend of even stronger growth for this industry in the coming year.

There are several reasons for the increased optimism in my forecast.

The first is that the overall U.S. economy is gradually getting stronger, and this is clearly evident in the employment data. The number of new jobs added each month is gradually rising, so with each passing quarter more people have more money to spend on medical supplies and equipment. This increase in consumer spending is not yet evident in certain other sectors of the economy, but as more people get jobs (especially jobs with medical benefits) the first things that will be purchased in some households will pertain to health care items that were previously postponed.

The second reason is that an increasing number of people have medical insurance as a result of the Affordable Care Act, also known as Obamacare. It is still too early to determine the long-term effect that the ACA will have on the medical supplies and equipment sector, but I think it is safe to say that it will put upward pressure on the production data in the short term. Obamacare is still not a popular program with many voters, and it may even be overturned at some point in the future. But it will remain the law of the land until at least the next President takes over in 2017.

I am also raising the forecast as a result of the recent Ebola scare. The data that I used to create this chart only runs through September of this year, so it does not include any of the effects of the response to the Ebola situation in the U.S. It will be interesting to see how the data is affected from now on as a result of the new strategies for dealing with Ebola and other such diseases.

I do not believe that the U.S. will suffer a widespread outbreak of Ebola. America has a robust health care system that responds very rapidly and thoroughly in times of crisis. Mistakes were made early on, but when the lives of health care workers are acutely at risk, people learn quickly. Nevertheless, I do believe that a large amount of money will be spent in the aftermath of this current scare.

Hospitals and other health care facilities will implement new protocols and training, and even paramedics and EMTs will be involved. This will result in a surge in demand for the supplies and products needed to deal with highly infectious diseases. Many of these supplies will be made from plastic and they will be packaged in plastic.

A substantial amount of money will also be spent trying to stem the tide of this outbreak over in Africa. A large volume of equipment and supplies that are manufactured in this country will be sent over there in an attempt to keep the virus from spreading more rapidly to America and other parts of the world.

These shorter-term factors such as epidemics and health care legislation will combine with the favorable long-term demographics that affect global demand for medical equipment and supplies. The population of the world is expanding, and more people mean that there is more need for health care products. Richer countries tend to have aging populations, and the people with money tend to spend more on health care products as they get older.

So it is quite likely that the long-term expansion in the medical supplies and equipment industry will continue to average a rate of growth that is at least 2 to 3 percent higher than the rate of expansion in the overall economy.

In 2014 and again in 2015, our forecast is calling for that difference to get as high as 4 percent. And if we experience a rise in the number of outbreaks of deadly epidemics, even that forecast may turn out to be too conservative.