Economic Environment 0904

8/8/2019 Economic Environment 0904

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THE CURRENT ECONOMIC ENVIRONMENT

By Wayne Wendling, Ph.D.Managing Vice President, Health Policy Resources Center

American Dental Association

According to the latest numbers from the U.S. Bureau of Labor Statistics, the unemployment rate hadreached 8.5% in March 2009. Those employed in the U.S. workforce had declined by more than fivemillion over the past 12 months. The Federal Reserves own internal analysis has become morepessimistic as it anticipates that the current economic downturn will continue through 2009 and possiblyinto 2010.

The National Bureau of Economic Research (NBER) is the official arbiter of economic recessions in theUnited States. The NBER is a non-profit economic research entity. Many of the top academiceconomists in the United States are fellows of the NBER. According to the NBER,

A recession is a significant decline in economic activity spread across theeconomy, lasting more than a few months, normally visible in production,employment, real income, and other indicators. A recession begins when the

economy reaches a peak of activity and ends when the economy reaches itstrough. Between trough and peak, the economy is in an expansion. (NationalBureau of Economic Research, Determination of the 2007 Peak in EconomicActivity, December 11, 2008, as available on the NBER website, April 9, 2009.)

The NBER judged that the current recession began December 2007. That is both when the priorexpansion ended and the current downturn began.

Different segments of the economy have their own cycles within the economy. For example,unemployment tends to lag or trail other movements in the economy. As noted in Figure 1 below,unemployment rates were quite stable from December 2007 to April 2008; but they have moved steadilyupwards since. Other indicators tend to move ahead of the general direction of the economy, such asstock prices.

Figure 1: UNEMPLOYMENT RATES BY REGION: 2007 - 2008

Source: Calculations made by the Health Policy Resources Center of the American Dental Association based on published datafrom the U.S. Bureau of Labor Statistics, March 2009.


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The Conference Board is a non-profit business membership and research organization. The ConferenceBoard maintains (1) The Conference Board Leading Economic Index

TM, (2) The Conference Board

Coincident Economic IndexTM

and (3) The Conference Board Lagging Economic IndexTM

. Thecomponents of each index are listed below in List 1; but weighting methods and other methodologicaladjustments are proprietary to the Conference Board. The components of the indices have changedthrough time due to changes in data availability and business practices. For example, just in timeinventory management strategies impacted the measurement of inventories and how it wasaccommodated in the index. (Individuals desiring greater detail regarding these indices, their calculation

and other details should contact the Conference Board.)

The general theory behind these indices is that there are certain economic measures that tend occur inadvance of changes in economic activity, there are other measures that move directly with economicactivity, and then others that tend to lag general economic activity. For example, building permits for newprivate housing are a signal of future construction activity. If new building permits decline relative to ahistorical trend, it could be signaling a downturn in construction activity. Conversely, the average durationof unemployment tends to lag general economic activity. An index of multiple individual measures isbuilt so that the index is broadly representative of the economy.

List 1: Indices of Economic Activity from The Conference Board

The Conference Board Leading Economic IndexTM

Average weekly hours, manufacturing

Average weekly initial claims for unemployment insurance

Manufacturers' new orders, consumer goods and materials

Index of supplier deliveries vendor performance

Manufacturers' new orders, nondefense capital goods

Building permits, new private housing units

Stock prices, 500 common stocks

Money supply, M2

Interest rate spread, 10-year Treasury bonds less federal funds

Index of consumer expectations

The Conference Board Coincident Economic IndexTM

Employees on nonagricultural payrolls

Personal income less transfer payments

Industrial production

Manufacturing and trade sales


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The Conference Board Lagging Economic IndexTM

Average duration of unemployment

Inventories to sales ratio, manufacturing and trade

Labor cost per unit of output, manufacturing

Average prime rate

Commercial and industrial loans

Consumer installment credit to personal income ratio

Consumer price index for services

Source: THE CONFERENCE BOARD LEADING ECONOMIC INDEXTM

(LEI) FOR THE UNITED STATES, March 19, 2009.

THE CURRENT RECESSION AND DENTISTS

Dentists have not been immune to recessions (see Figure 2); but similar to much of the health caresector, dentists have tended to weather previous economic downturns. Is this economic downturndifferent? Some features of this downturn are very similar to others: fluctuations in oil prices, rapidincreases in housing prices, the resulting rapid increases in the ranks of the unemployed, in addition toother factors. However, the meltdown in the financial markets, the broad and rapid decline in stockprices, and the resulting loss of wealth and the loss of trust in the financial sector appears to be impactingthe consumer differently than prior recessions. How are dentists being impacted?

Figure 2: Real Net Incomes of Independent General Practitioners and Year End UnemploymentRates: 1981 - 2006

Source: American Dental Association, Survey Center, Survey of Dental Practice, Selected Years, and U.S. Bureau of LaborStatistics, public use data, downloaded March 9, 2009.


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The American Dental Association initiated a quarterly survey of economic confidence of dentists duringthe 4

thquarter of 2008. The Survey Center of the Health Policy Resources Center developed the survey

questions in conjunction with the Council on Dental Practice, and administers the e-mail survey eachquarter. The survey collects directional change of key dental metrics for dentists and assesses theconfidence dentists have in the overall economic conditions for their dental practices. Two surveys havebeen completed to date and approximately 1,700 dentists have responded to each survey. (Thestatistical margin of error on the results is plus or minus 2.2 percent.)

The initial results for the 3rd

quarter of 2008 indicated that approximately 50% of dentists wereexperiencing lower billings, collections and net income, approximately 30% of dentists were seeing nochange in billings, collections and net income, and approximately 20% of dentists were experiencinggrowth in these categories. There was a slight deterioration of these results for the 4

thquarter as the

percent of dentists who indicated lower levels of billings, collections and net income grew slightly and thepercent of dentists who reported higher billings, collections and net income declined slightly in the 4

th

quarter. Figures 3-12 at the end of this document summarize these results.

Other key indicators were quite stable across the 3rd

and 4th

quarters:

Approximately 50% of dentists were reporting that treatment acceptance rates were lower;

Approximately 45% of dentists were reporting that the number of new patients was lower;

Approximately 55% of dentists were reporting that open appointment time was higher; and

Approximately 60% of dentists were reporting that average days of accounts receivable was

about the same.

With respect to future confidence, dentists confidence declined slightly between the 3rd

and 4th

quarters.For example, whereas more than 56% of dentists were somewhat or very confident regarding the overalleconomic conditions for their practices in the 3

rdquarter, approximately 52% were either somewhat or

very confident in the 4th

quarter of 2008.

The responses of dentists appear to reflect the underlying conditions of their regions. For example, ahigher percent of dentists in the South Atlantic area (which includes Florida) report lower net incomes andlower gross billings. Florida is the area that is suffering from the highest home foreclosure rate.

Often, there is a tendency to make broad generalizations regarding economic fluctuations. However,some areas of the economy are doing much better than the overall economy and others are doing worse.For example, the unemployment rate in Iowa was 5.7% as of April 2, 2009; whereas the correspondingunemployment rates were 12.8% in Michigan and 10.9% in California. Therefore, we are still seeingpockets of prosperity for dentists.

Figure3:NetIncome

2=10.52,p=0.0052*

Figure4:GrossBillings

2=8.236,p=0.0163*


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Figure5:Collections

2=12.69,p=0.0018*

Figure6:AdjustmentsandWriteOffs

2=1.35,p=0.5089(n.s.)

Figure7:TreatmentAcceptanceRates

2=4.78,p=0.0917(n.s.)

Figure8:NumberofNewPatients

2=1.87,p=0.3930(n.s.)

Figure9:OpenAppointmentTimes

2=2.49,p=0.2884(n.s.)

Figure10:AverageDaysofAccountsReceivabl

2=2.19,p=0.3339(n.s.)

*Statisticallysignificant.


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Figure11:ConfidenceinFutureEconomicConditions

2=6.21,p=0.0447*

Figure12:ConfidenceinFutureGrossBillings

2=4.88,p=0.0873(n.s.)

*Statisticallysignificant.

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Economic Environment 0904