Part Time Workers, Consumer Spending, And The Affordable Care Act

Don’t worry, no political arguments will be made here. That is not worth the effort for the author or the readers of this blog. However, since we are focused on stock picking as investors, it is a valuable exercise to dig into the data and determine if there will be a material impact on U.S. corporate profits because of the Affordable Care Act. After all, if consumers’ pockets are squeezed from fewer hours worked each week and/or the need to start buying health insurance for the first time, that would definitely impact the sales and earnings of the companies we are invested in. And that could hurt our portfolios.

Since the September jobs report came out this week I decided to take a look and see if the trend than many people fear as a result of the new healthcare law — employers shifting full-time workers to part-time status in order to be exempt from being required to provide them with health insurance — has actually started to take hold. Many people have already argued one way or the other, but most of them have political motivations and rely on a small subset of anecdotal reporting without actually looking at the numbers and reporting the truth.

The good news for our investment portfolio is that this trend has yet to materialize. It certainly could in the future, so we should continue to monitor the situation, but so far so good. Last month there were 27, 335,000 part-time workers, out of a total employed pool of 144,303,000. That comes out to 18.6% of all employed people working part-time (defined as less than 35 hours per week). That compares with 26,893,000 part-time employees during the same month last year, which equated to 19.1% of the 142,974,000 employed persons. Interestingly, part-time workers are actually going down in both absolute terms and relative to full-time workers. These numbers will fluctuate month-to-month, but it clearly has not happened as of yet.

The other potential problem with the Affordable Care Act, and more specifically the requirement that everyone buy health insurance, is that discretionary consumer spending could fall as more of one’s after-tax income goes towards insurance and is not spent on discretionary items. We should remember of course that consumer spending counts the same in the GDP calculation regardless of whether or not we buy insurance or other things, so there is no overall economic impact. But, we should expect to see consumers allocate their funds differently, which could impact specific areas of the economy (vacationing, for instance).

But just how much of an impact will this have? Will it be large enough to materially hurt the earnings of many public companies? To gauge the overall potential for that we need to dig into more numbers.

About 15% of the U.S. population does not have health insurance. Let’s assume 100% compliance with the Affordable Care Act (either via the purchase of insurance or the payment of the penalty for not doing so). Let’s further assume that the net negative financial impact of such compliance comes to 5% of one’s income (not an unfair assumption based on insurance premiums). That means that approximately 0.75% of consumer spending (5% x 15%) would be reallocated to healthcare and away from other areas. While that is not a big shift, it would be real.

However, the analysis can’t end there. We can’t simply conclude that approximately 1% of non-healthcare consumer spending will be lost due to the new law. Why not? Because that would assume that every American earns the same income. In reality, those impacted by the Affordable Care Act (the uninsured), are skewed towards lower and middle income folks. Most wealthier people get health insurance through their full-time jobs and will continue to do so.

Now, the bottom 50% of Americans only make 15% of the income earned nationwide. If we factor that point into the equation, then the overall impact on consumer spending goes from quite small (0.75% per year) to fairly immaterial. In fact, it comes out to something around 0.2% of overall consumer spending per year if we assume that the average uninsured person falls into the 25th percentile of total income.

So what is my conclusion from all of this? Well, I own a lot of shares in consumer-related companies both personally and for my clients, and I am not concerned about the Affordable Care Act taking a meaningful bite out of the profits that those companies are going to generate in the future.

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One Thought on “Part Time Workers, Consumer Spending, And The Affordable Care Act

  1. Good insight Chad. If these were the only issues that could impact consumer spend I’d feel a lot more comfortable.

    The problem I am seeing is a rise in health care costs for the middle class. Premiums are higher for most (65% to 250%+) than traditional plans and even if they are not, the deductibles are. For many a case of pneumonia or a minor surgery could be financially catastrophic with a 12,000 deductible. The focus on premiums with inflating deductibles feels like a car insurance sales tactic that only advertises a monthly payment when the interest rate pushes the legal max.

    Yes, some small businesses will opt to use more part time employees but for others this isn’t an option. SMBs are now at a huge disadvantage trying to compete with larger companies because they do not have the scale to absorb the higher costs. These costs will have to be passed onto the consumer or employees through reduced pay/benefits.

    Consider a young middle class family with children. They could very likely face higher premiums, higher deductibles, higher child care costs (most day cares do not offer health insurance now) and higher prices from all SMBs that will be forced to raise prices to stay in business.

    Adding to the issue is minor the penalty to not carry insurance. Many of the uninsured today opt to not pay for insurance subsidized by their employer. Unless these people are eligible for 0 cost coverage they will likely opt for the meager penalty.

    Overall I do not think we have ever seen a program that will have this type of sweeping impact on consumer spend. I fully expect the public response to snowball into a panic state as everything comes to light.

    There is no time to correct this now.

    I expect a bottom at or below 2007/08 levels and have already gotten out of the market entirely. I will re-enter once the correction has been made factoring reduced consumer spend and invest in down market industries/products and borderline monopolies such as GOOG.

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