Moody's chief economist Mark Zandi: Recession risk is high, but not inevitable

Photos: Lotus Eyes Photography for HIMSS

CHICAGO – “I’m guessing that the number one question you have for me is are we going to experience recession? And if so, when and how severe will that recession be?” said Mark Zandi, chief economist and cofounder of Moody’s Analytics at HIMSS23 on Friday.

“There’s a lot of talk about recession,” he said. “In fact, in the 30 plus years that I’ve been a professional economist, I don’t think I’ve ever seen so many people so pessimistic about the economy going forward.”

Some good news, potentially.

“I’m going to make the case that while the next 12 to 18 months are going to be difficult ones – and I think it’s important not to be pollyannaish about what’s ahead – I think we have quite a chance to get through without an outright economic downturn.”

Economists, when they think about the future, are also looking at history, said Zandi.

“And historically when the economy has been struggling with high inflation, and clearly we’ve been struggling with that, and the Federal Reserve is raising interest rates aggressively to combat that inflation, to try to slow the economy’s growth rate, to quell the inflationary pressures, when that’s happened in the past, recession often ensues.”

But it’s not inevitable.

“There’ have been cases where we’ve kind of navigated through without a downturn,” said Zandi, “but it’s very, very difficult for the Federal Reserve to thread the needle to raise rates high enough, fast enough to slow things down and quell the inflationary pressures, but not raise rates so high so fast that it undermines the economy.”

Still, while “recession risks are high,” he said, “I do think recession is avoidable.”

First, the obvious.

“Inflation is the number one problem we face today,” said Zandi. “Just to give you a little bit of context around that, the average American household today needs to spend almost $350 more a month to buy the same goods and services that they purchased a year ago. But I am expecting that inflation has started to slow and I’m expecting it to moderate going forward.”

Meanwhile, some other factors are shifting as well.

The pandemic hit three years ago and disrupted global supply chains and disrupted the labor market. And, of course, the Russian war in Ukraine, which came on the scene over a year ago, caused oil and natural gas prices to go skyward.

“Those two massive shocks to the economy are now increasingly in the rearview mirror,” said Zandi. “The Russian war in Ukraine continues on, but its economic fallout seems to be fading and pandemic continues to become less and less of an issue.

“So we are starting to see inflation start to come in,” he said. “The last data point we got for the month of March showed that inflation is back down to 5%. My expectation here going forward is for that to moderate as we make our way through all through 2023 to 24 and all this I expect to happen with just a modest further increase in interest rates.”

Fortunately, he added, “healthcare has been a plus, not a minus, in terms of the inflation picture. There’s pluses and minuses here, depending on one’s perspective. But the fact that healthcare inflation has remained so modest has been very important to helping to bring in overall inflation.”

This shows the cost of medical care services – medical care, commodities, pharmaceuticals and medical equipment and supply, relative to overall prices.

“During the pandemic period, since the pandemic hit, we have seen relative prices come in,” he said. “Not that prices are falling, but that they are growing more slowly than overall inflation. And that’s been a significant help here in trying to keep inflation from becoming an issue.

“A lot of this goes to demand,” he explained. “Early on in the pandemic, people weren’t using the healthcare system to the same degree that caused prices to come in. And that’s not changing, obviously. I’ll come back to that in a few minutes. It does pose a risk, but so far so good. The modest inflation in the healthcare sector has been very important to keeping inflation from taking off to a more significant degree.”

Still, Zandi said he remains concerned about two potential risks.

“First is the banking crisis. Remember back a few weeks ago we saw a couple of banks fail on Silicon Valley Bank and Signature Bank. That set off a lot of concern among depositors in the banking system. We saw a bank run. The banking system was surprised by what happened, the pace at which people pulled their money out of the bank, which was quite shocking.”

The good news is the crisis looks to be over for now, he said. “he government has stepped in in a very aggressive way. And banks, particularly smaller banks and mid-sized banks, have turned much more cautious in their underwriting standards and lending standards.”

Another risk is more of a wild card: the potential for failing to increase the debt ceiling.

“I’ve seen a lot of battles over the Treasury debt limit over the years going back over 30 years of being a professional economist. And based on that historical experience, I think we think it’s reasonable to conclude that at the end of the day lawmakers are going to come to terms and sign a piece of legislation that will increase the limit and we don’t have a problem.

“But I’ll have to say in the 30 years I’ve never seen such a kind of vexed environment in Washington D.C.” he added. “Both because of the kind of the acid political backdrop that we’re all navigating through with just the current circumstances in the House of Representatives.”

The possibility that “there’s a mistake here, that lawmakers don’t sign a piece of legislation at a time the treasury reaches the debt limit and someone doesn’t get paid in a timely way is a nonzero possibility,” said Zandi.

Even if the debt ceiling is eventually raised, “what is highly likely is that between now and then we get closer to that X date, we will see increasing drama and angst and that might manifest in the form of lower stock prices and higher interest rates and a lot of volatility in financial markets which is exactly what we don’t need in an economy that’s struggling to avoid a downturn.”

When it comes to healthcare specifically, “one of the most significant challenges I think for the economy and particularly for the healthcare industry is labor costs and just finding qualified workers,” said Zandi

“We have a very significant demographic issue. It was developing long before the pandemic. The pandemic just exacerbated the problems in the job market in the healthcare industry. But these were developments that were coming to the fore even before the pandemic and now becoming much more significant on the other side of it.

“The other demographic that’s really important is immigration. We rely very heavily on immigrants, both skilled and unskilled. Historically we relied on about a million immigrants coming into the country every single year. Obviously that got nailed during the pandemic. And because of shifts in policy and politics around that, immigration has been impaired. Going forward, immigration is going to be weaker than it has been historically.”

That means that tighter labor conditions will continue “for the foreseeable future,” he said.

That’s no small matter for the healthcare industry, which is “arguably the most labor intensive industry in the economy,” he said.

“It’s an ongoing issue that is not going to go away and it’s putting significant pressure on margins in the industry broadly. The healthcare system profitability returns are very stressed because of the rise in labor costs and the difficulty the healthcare sector is having raising its prices. The price growth in the inflation healthcare sector has been relatively constrained.”

Since Obamacare, and all its attending cost-reduction reforms, “healthcare prices have just barely kept pace with overall inflation,” said Zandi. “So you combine the severe shortages of labor, very strong growth in labor costs and on top of that restrained pricing because of policy changes and competitive pressures, margins are going to be compressed and this is going to be very challenging for the healthcare sector for the foreseeable future.”

But there’s “one good way out of this kind of squeeze, and that is raising productivity,” he said. “That has got to happen. And that goes to all the work that you’re doing here at HIMSS and your work in your organizations trying to figure out ways to improve productivity growth of the healthcare sector.”

Another opportunity, Zandi said, is “new technologies are coming on very quickly.”

He mentioned AI and machine learning, specifically.

“I do think that there is a lot of opportunity here for improving productivity growth, particularly in information-intensive industries like the healthcare sector,” said Zandi – who noted that his first job involved developing neural nets for the old Shawmut Bank in Boston more than 30 years ago.

“What we have now that we didn’t have then is a lot more data, and a lot better data,” he said. “And perhaps even more importantly, that tremendous computing power that allows us to process more information, data we have historically. So there is an enormous opportunity here in helping to lift the productivity gains going forward.”

There are still going to be challenges – particularly around what he called the “black box issue.”

Oftentimes AI produces decisions and relationships that you don’t understand, or can’t explain them intuitively.

“Now, for an economist to say, ‘This is happening, but I don’t understand it,’ everyone says, ‘OK, I get that. I’d sort of love to know why it’s happening, but I understand what you’re saying.’ But I can’t imagine the doctor saying that to a patient: ‘This is what’s happening, this is what the data says, this is what the statistics say, but I don’t know why.’ So that’s an issue.”

But ultimately, AI is a “game changer” for healthcare, and for the wider economy, he said.

“At the end of the day, the nation’s economy-wide fiscal health relies on the healthcare sector,” said Zandi. “There is no more significant contribution to our long term fiscal issues nationwide – Medicare, Medicaid and the cost of those things – if we’re going to address our long term fiscal situation, if we’re going to be able to have a strong and healthy economy in the long run, we need a strong, healthy healthcare sector.”

Mike Miliard is executive editor of Healthcare IT News
Email the writer: [email protected]

Healthcare IT News is a HIMSS publication.

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