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 had
reached 8.5% in March 2009. Those employed in the U.S. workforce had declined by more than five
million over the past 12 months. The Federal Reserve’s own internal analysis has become more
pessimistic as it anticipates that the current economic downturn will continue through 2009 and possibly
into 2010.

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

“A recession is a significant decline in economic activity spread across the

economy, 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 its
trough. Between trough and peak, the economy is in an expansion.” (National
Bureau of Economic Research, “Determination of the 2007 Peak in Economic
Activity”, 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 prior
expansion 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 steadily
upwards since. Other indicators tend to move ahead of the general direction of the economy, such as
stock 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 data
from 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 Conference
Board maintains (1) The Conference Board Leading Economic IndexTM, (2) The Conference Board
Coincident Economic IndexTM and (3) The Conference Board Lagging Economic IndexTM. The
components of each index are listed below in List 1; but weighting methods and other methodological
adjustments are proprietary to the Conference Board. The components of the indices have changed
through time due to changes in data availability and business practices. For example, “just in time”
inventory management strategies impacted the measurement of inventories and how it was
accommodated 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 in
advance of changes in economic activity, there are other measures that move directly with economic
activity, and then others that tend to lag general economic activity. For example, building permits for new
private housing are a signal of future construction activity. If new building permits decline relative to a
historical trend, it could be signaling a downturn in construction activity. Conversely, the average duration
of unemployment tends to lag general economic activity. An index of multiple individual measures is
built 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

TM
Source: THE CONFERENCE BOARD LEADING ECONOMIC INDEX (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 care
sector, dentists have tended to weather previous economic downturns. Is this economic downturn
different? Some features of this downturn are very similar to others: fluctuations in oil prices, rapid
increases in housing prices, the resulting rapid increases in the ranks of the unemployed, in addition to
other factors. However, the meltdown in the financial markets, the broad and rapid decline in stock
prices, and the resulting loss of wealth and the loss of trust in the financial sector appears to be impacting
the consumer differently than prior recessions. How are dentists being impacted?

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

Source: American Dental Association, Survey Center, Survey of Dental Practice, Selected Years, and U.S. Bureau of Labor
Statistics, public use data, downloaded March 9, 2009.
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The American Dental Association initiated a quarterly survey of economic confidence of dentists during
the 4th quarter 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 each
quarter. The survey collects directional change of key dental metrics for dentists and assesses the
confidence dentists have in the overall economic conditions for their dental practices. Two surveys have
been completed to date and approximately 1,700 dentists have responded to each survey. (The
statistical 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 were
experiencing lower billings, collections and net income, approximately 30% of dentists were seeing no
change in billings, collections and net income, and approximately 20% of dentists were experiencing
growth in these categories. There was a slight deterioration of these results for the 4th quarter as the
percent of dentists who indicated lower levels of billings, collections and net income grew slightly and the
percent of dentists who reported higher billings, collections and net income declined slightly in the 4th
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 overall
economic conditions for their practices in the 3rd quarter, 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, a
higher percent of dentists in the South Atlantic area (which includes Florida) report lower net incomes and
lower 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 corresponding
unemployment rates were 12.8% in Michigan and 10.9% in California. Therefore, we are still seeing
pockets of prosperity for dentists.

 
Figure 3: Net Income  Figure 4: Gross Billings 

 
  2 = 8.236, p = 0.0163* 
2 = 10.52, p = 0.0052*   
 

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Figure 5: Collections  Figure 6: Adjustments and Write‐Offs 

 
2 = 12.69, p = 0.0018*  2 = 1.35, p = 0.5089 (n.s.) 
   
   
Figure 7: Treatment Acceptance Rates  Figure 8: Number of New Patients 

* Statistically significant. 

 
  2 = 1.87, p = 0.3930 (n.s.) 
  = 4.78, p = 0.0917 (n.s.) 
2
 
 
Figure 9: Open Appointment Times  Figure 10: Average Days of Accounts Receivable 

 
2 = 2.19, p = 0.3339 (n.s.) 
 
 
2 = 2.49, p = 0.2884 (n.s.) 
 
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Figure 11: Confidence in Future Economic Conditions  Figure 12: Confidence in Future Gross Billings 

 
  2 = 4.88, p = 0.0873 (n.s.) 
2 = 6.21, p = 0.0447* 

* Statistically significant. 

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