Health care expenditures (HCE) have become a financial and economic black hole, sucking in, absorbing and consuming net national income faster than it is being generated. This is not only the definition of unsustainable, it is a crisis.
It has been nine months since I last addressed the health care industry in the column, "Correction in Health Care Stocks Remains in Full Force."
In this column I'll consider what the trajectory for HCE implies for economic activity and monetary policy within the context of the bifurcating economy I discussed in the column, "Gap Widens Between 2 U.S. Economies."
I've discussed the net drag on economic potential caused by increases in HCE in numerous past columns, so I won't reiterate why that's so here. The essence of it, though, is that the entire sector provides a low multiplier effect. The financial resources dedicated to it are consumed.
Public and private HCE combined represents about 20% of GDP and is continuing to grow faster than the rest of the economy.
It works out to about $10,000 per capita, and about $26,000 per household, which is roughly equal to half the median household income of about $50,000.
Total HCE is also growing faster than net national income, which means servicing further increases in it must either come by way of reallocating discretionary income for individuals or by reallocating discretionary federal budget spending at the public level.
The importance of this now from an economic standpoint is that insurance premiums under the Affordable Care Act are expected to grow by another 10%-11% nationally in 2017, according to the Kaiser Family Foundation.
This has multiple implications for the capital markets and economy, as well as monetary and fiscal policy.
For capital markets, it means the increase in HCE in 2017, with individual insurance premium increases starting in November, will be greater than the total expected increase in national income in 2017.
That means the entire rest of the economy will have to divide a smaller portion of national income as HCE grows. The sectors logically most negatively impacted by this will be those catering to discretionary income spending, which I addressed in the column, "The Decline in Discretionary Spending Capacity Is a Problem."
That column was a follow-on to the column, "New Consumption Trends Make the Fed Impotent," in which I noted that the income younger consumers were able to recapture by way of not purchasing a home had been diverted into discretionary spending.
With HCE continuing to advance faster than the rest of the economy, the income that was diverted from housing to discretionary spending is now going to be diverted into HCE.
The implications for those stocks is obvious.
From a monetary policy issue, this represents a huge problem.
HCE is 25% of core personal consumption expenditures (PCE), the Fed's policy metric for measuring inflation, and 75% of HCE is made of the cost of providing health care services.
The cost of health care services is primarily a reflection of the cost of human labor in the health care sector.
Those costs have been rising at twice the rate of GDP growth for the past few years, but its impact has been negated and obfuscated by the derivative impact of falling oil prices on the other sectors of core PCE; i.e., reduced transportation and utilities expenses and pass-through reductions in the costs of food, recreation, apparel, etc.
With oil prices stabilizing and HCE increasing, the logical implication for core PCE is for it to begin to increase, which raises the bifurcated-economy issue for the Fed again.
As I discussed last weekend in the column, "FOMC Becomes Consciously Obtuse," the Fed has clearly decided to switch its focus to PCE and away from unemployment and wage growth.
The increase in HCE will logically start to be reflected in rising core PCE soon, which is what the Fed models indicate warrants rate hikes.
The problem for the Fed and monetary policy is that it will be indicative of an economy in which net national income is being increasingly diverted away from high-multiplier production and consumption and toward low-multiplier areas.
Just as the Fed has refused to consider the possibility that technology may be driving up structural unemployment and making it permanent, it has provided no guidance on how it would view monetary policy in an environment wherein its inflation measure was increasing while real economic activity was decelerating.
As more and more money is sucked into health care, the economy will slow but the Fed's chosen economic metrics will indicate that rate hikes are necessary.