Consumer Confidence Index and Professional Practice
Hello, this is Scott McDonald and welcome to the Perfect Place to Put a Practice Podcast.
There are likely some good doctors who would just like me to tell them where to put a practice and have done with it. But this session is going to discuss a topic not limited to where to put a practice. It also deals with the circumstances of opening a practice or purchasing one. Additionally, it can provide you hints on what to look for in a place that has most potential and help you avoid places without it. But I will warn you, this may get a little complicated because we are going to deal with the topic of dental and medical economics.
At the time of this recording, the Federal Reserve has announced that it will shortly start a series of interest rate hikes over the next year or two. If the rates increase, it will influence how much you are going to have to pay on a loan by making it more expensive to borrow money. For nearly a decade, the Fed has kept interest rates near zero to encourage business activity. The assumption is that if the economy is not growing, low rates will encourage investors including doctors, to accept more risk. According to some economists, this should have a snow-ball effect of increasing investment and other wealth generating behaviors. At least, that is the theory. What your lender may not have explained to you is that when rates are very low, banks are other lenders are inclined to offer smaller loans and even then, only offer loans to those who only have great credit. That is because the lenders are undertaking greater risks with their money. When rates go up, lenders are inclined to offer larger loans and to offer them more freely.
This brings us to the real meat of this podcast session. The Federal Reserve is going to set its rates higher because it looks as though the economy is doing better. They will point to increased wages, higher rates of employment, and an improving labor participation rate. At least that is what they will say in their news releases. But the truth is, they are using one metric in particular to show that the economy is improving: the Consumer Confidence Index or CCI. Now, it is certainly true that the CCI is important to practices. There is lots of evidence to suggest that during the Great Recession, fewer people were going to the dentist. And when they DID go, they spent less money out-of-pocket than before. Further, getting patients to accept a full-treatment plan was more difficult. It was not necessarily because people had less money in their pockets. On the other hand, they had a decline in Consumer Confidence. By definition, the CCI is an indication of the degree of optimism (or lack of optimism) on the state of the economy that consumers are expressing through their activities of saving and spending. While things get more expensive to finance (like equipment), higher rates tend to encourage people to save more. The idea behind consumer confidence is that a happy consumer - one who feels that his or her standard of living is increasing - is more likely to spend more and make bigger purchases, like a new car or home. Or even dental implants.
So, stick with me here because this will have a direct bearing on where you should consider a practice. The CCI is set by the Conference Board based on a rolling survey of 5,000 households nation-wide. It compares 5 questions of optimism that were first measured in 1985. As with all indices, 100 is considered the norm from which everything is contrasted. So, the Federal Reserve Board is trying to figure out what is likely to happen by contrasting current confidence figures with those set in 1985.
Since the election in November, most of the Federal Reserve Banks have reported a surge in Consumer Confidence. As you may know, there are 12 of these Federal Reserve Banks and each one is measuring the CCI and other economic metrics for the areas in the U.S. that they represent. Each of them is trying to determine the measure of optimism of current and future feelings regarding the economics in their local areas or regions. Rates of the Fed and policies regarding economics are set at big meetings of the nation’s fed governors.
Now, what does that have to do with YOU? At its simplest, it means that the CCI throughout the nation has improved. That is one reason that the stock-market has made a dramatic rally in the last several months. It suggests that nationally, there is a feeling that the future economic condition of the U.S. will be better. Part of this might be due to the imminent repeal of ObamaCare. Part is likely due to the state and federal commitment to tax reform and infrastructure spending and even job growth. The immediate bad news is that money will cost more to borrow. But it is also an indication that patients are likely to spend more on their dental care as they have more confidence in their finances. After all, the CCI seems to have a strong correlation to patient expenditures. Nevertheless, I do not have great confidence in national statistics as a predictor of patient behavior in all parts of the Country. You see, healthcare practices including dental practices are influenced more by local economic confidence that in national indices.
You will recall that I mentioned that there are 12 Federal Reserve Banks. Only some of them are showing greater consumer confidence than others. One reason for this is that the local regions are helped or hurt in the local CCI by tax policies and other market factors. In those locations with lower taxes, for example, there is a tendency to benefit from greater investment. More homes can be built. More businesses can be started. Payrolls go up. At Doctor Demographics, we track all of these factors along with demographic trends such as population size, competition ratios, and age. At the same time, in some locations, the local economy may diminish and stagnate which is often predicted by a diminishing CCI. In short, based upon the LOCAL economic environment, the differences between the direction the Federal Reserve Banks’ CCI are becoming greater. This means that some districts are showing far more promise on a local level than others. The CCI is just a helpful indicator of the future potential of an area.
Please note: This is not a demographic issue! It is not caused by an increase (or decrease) of population or the demographic character of its households. Instead, it is the single best indicator that an area that one is considering for practice will improve or not over the life of the practice. It is a sign that things will get better or the will get worse. Admittedly, for those who are considering investing in a building, its relevance is greater than for one who has less in the way of a tangible investment. For this reason, we at Doctor Demographics track the Reserve Bank regions and their various confidence scores (even though we wish we could get the data in a more timely fashion). But you have to keep in mind that it is not the assets of the various banks that are at issue. New York’s Bank is by far the largest at more than $2.6 Trillion while, Minneapolis, with $33 Billion is the smallest. Rather it is the CCI score that each bank tracks that will count in predicting economic health and growth.
Don’t you feel smarter now?
This is Scott McDonald. You have been listening to the Perfect Place to Put a Practice Podcast. Visit us at DoctorDemographics.com and let us help you find where to open your primary office, satellite, or second location.
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Consumer Confidence and Dental SItes
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