Government and Health Care Spending Account for More Than 50% of GDP Growth
And the percentage could go higher still if recent government projections prove accurate
I wrote earlier this week about the disconnect between above-trend U.S. GDP growth and sales weakness among a wide variety of consumer companies, particularly given that consumer spending accounts for nearly 70% of GDP. I noted that much of the disconnect is the result of an outsized percentage of GDP growth coming from government spending and health care spending, neither of which accrues to the benefit of most consumer companies (other than retailers with a pharmacy business).
For this post, I’ve combined the two large health care components of GDP (“health care” within services and “pharmaceutical and other medical products” within goods) such that I could calculate total health care spending as a percentage of GDP growth. Those two categories accounted for 14% of GDP in 2022. According to the Centers for Medicare & Medicaid Services (CMS), a federal agency within the HHS, health care spending was 17.3% of GDP that year. In other words, the figure I’m using is a rough approximation of health care spending. Health care spending accounted for 24% of GDP growth in 3Q and 29% over the past two years compared to the pre-COVID (2007-1Q20) average of just 14%, the latter of which was proportional to the size of health care spending. The outsized growth in health care spending is evident in the 3Q GDP release from the Bureau of Economic Analysis (BEA): the two biggest contributors to consumer spending growth were nondurable goods (led by prescription drugs) and health care (led by outpatient services).
The same story applies to government spending: it accounted for 30% of GDP growth in 3Q and 23% over the past two years, compared to the pre-COVID average of just 7%. For perspective, government spending accounts for 17% of GDP. As the BEA noted in the release I just linked to, the growth in 3Q GDP primarily reflected increases in consumer spending, federal government spending, and exports.
Combined, health care and government spending accounted for 54% of GDP growth in 3Q and 52% over the past two years, compared to the pre-COVID average of 21% and to the 31% of GDP they account for.
Based on CMS projections, health care spending will account for an ever-larger share of GDP in the decade ahead, from the aforementioned 17.3% in 2022 to nearly 20% in 2032. In other words, health care spending will continue to outgrow the economy. Why? As the Peter G. Peterson Foundation recently noted, the population is aging and health care costs are rising. The CMS projects health care cost inflation and growth in the use of health care goods and services will lead to health care spending growth of 5.6% over the 2027-2032 period, faster than the rest of the economy (4.1%).
And based on the Congressional Budget Office’s (CBO)’s most recent projections (the CBO is another federal agency), subject to change under the new administration, federal budget deficits are expected to grow from their historically high levels ($1.83 trillion in fiscal year 2024) to $2.8 trillion by fiscal year 2034. Given the country’s fiscal trajectory, a Will Rogers quote comes to mind: “We shouldn’t elect a President. We should elect a magician.”
On these projections, the trends I highlighted appear likely to persist if not intensify. Rising health care spending, combined with substantial cost increases on other necessities such as housing, food and insurance, has crimped spending on discretionary items, evidenced by weakness in consumer company results and an ever-expanding list of sales guidance reductions.
