While more data is expected, based on the data I currently have, I have lowered my forecast a bit for U.S. industrial production of medical equipment and supplies in 2015.
The current forecast calls for an increase of 4.7 percent when compared with the total output of 2014. This is moderately lower than the gain of 6 percent for this year that I forecasted last quarter, and the actual gain of 6.3 percent registered in 2014.
This new forecast is based on data from two sources: the most recent Plastics News Business Monitor Index survey for the first quarter; and the Federal Reserve Board's monthly industrial production index for the medical equipment and supply industry from the first three months of this year.
Our Business Monitor Index for the medical sector for the first quarter came in at 106.1. A value over 100 indicates an increase in business. The value of 106.1 compares favorably to our Total Business Monitor Index of 104.5, which measures activity levels across all sectors of the plastics industry. This data indicates that the medical sector continues to be amongst the strongest and fastest growing end-markets for plastics parts and packaging.
The most significant differences in the results from processors serving the medical end market compared with the overall plastics industry were in the areas of export orders and capital spending plans in the coming year. Processors who supply the medical sector appeared to be less vulnerable to the sharp rise in the value of the dollar in the first quarter than other processors. Export orders for many processors declined markedly in the first quarter, but medical processors actually reported a modest increase in export orders.
Processors of medical-related products also reported significantly higher plans to buy capital equipment in the coming year. In all of the other categories we measure and include in the accompanying table, the sub-index values we calculated for the overall index and the medical segment were quite comparable.
One other significant difference that turned up in our survey results is that processors serving the medical industries are more worried than average about the shortage of qualified candidates for job openings. The data indicates there was a substantial increase in the number of employees in the plastics industry in the first quarter, not only in the medical sector but for processors that served most other major end markets as well. The data suggest that the lack of qualified candidates may be even more of a problem for processors of medical parts.
So despite the economic “soft patch” indicated in some of the other macro-economic indicators, our data suggest that the medical sector expanded at a solid rate in the first quarter. This finding is corroborated by data from the Federal Reserve Board, but with some qualifications.
According to the Fed's monthly industrial production index for the medical equipment and supplies industry, the total U.S. output of these products expanded by 5 percent when compared with the first quarter from a year ago. This is a very solid rate of expansion, but the pace of growth decelerated in the first quarter when compared with the pace at the end of last year.
As mentioned above, the output of medical equipment and supplies increased by 6.3 percent in 2014 when compared with the annual total from 2013. And output in the first quarter of 2015 was actually down slightly from the total in the fourth quarter of last year. So the trend of year-over-year growth continues, but it is decelerating.
Just to be clear, I will state again that I expect U.S. output of medical supplies and equipment to expand at a solid pace in 2015 when compared with last year, but at this time I expect that the annual rate of growth will be moderately slower than it was in 2014. To be sure, I will continue to closely monitor the trends in this data, and I encourage the plastics processors who supply this industry to do the same.
This is because the trends in this industry have a unique and rather peculiar cyclical pattern that does not correlate with other economic indicators. As the chart illustrates, this data typically exhibits a very strong cyclical pattern with the timing from peak to peak or from trough to trough occurring every 2 to 3 years. The amplitude of these cycles typically goes from -1 percent at the trough to as high as 10 percent at the cyclical peak with most of the recent peaks occurring at around 6 percent.
This pattern was broken last year when the cyclical downtrend that began at the end of 2013 was abruptly reversed. The implementation of the Affordable Care Act may have had something to do with the reversal of the downtrend. Or it may have been due to a combination of some other factors, such as the outbreak and subsequent preparations for the Ebola virus.
But whatever the reason, I do not expect the medical equipment and supplies industry to expand at the rate of 6 percent per year indefinitely like it has for the past two years. I do expect demand for these products to continue to grow at a solid pace, and I also expect that the cyclical pattern in this data will resume at some point.
As we are all aware, demand for medical products is not exclusively based on economic trends. It is also affected by less predictable factors such as changes to existing health care policy from the state or federal governments, the outbreak of a major epidemic and the discovery of a significant remedy or therapy. Trends in the economic indicators such as employment and household incomes can also play a factor, but not always.
Due to well-known demographic factors, the long-term outlook for this industry continues to be quite bright. But the changes in the growth rate from year to year can still pose challenges for managers and business owners who supply this industry.