United States / Analyst Insights
Key Players: The Top Contributors to GDP
by The IBISWorld Team
Nov 21 2013

Four years have passed since the recession officially ended, leaving a deep scar on the US economy. Nevertheless, the country proved to be resilient, with signs of recovery everywhere; households are spending again, businesses are investing and hiring, and home and auto sales are surging. The national unemployment rate is anticipated to drop to 7.6% in 2013, which is substantially lower than it was in 2009, at 9.3%. While some industries have yet to return to prerecession levels, other industries have not only come out of the recession sturdier and without significant damages to their bottom lines, but they are also expected to bolster economic growth in the coming years.

IBISWorld has analyzed more than 1,000 US industries and various macroeconomic drivers that have a material impact on industry performance and identified those that are considered pillars of the economy. These pillars include total health expenditure, home and vehicle sales, consumer spending and the industrial production index, with each of these drivers making a sizeable contribution to US GDP.

Healthcare spending

Given the essential nature of healthcare services, it is not surprising that most healthcare industries not only fared well during the past five years but also outperformed other sectors of the economy. According to the most recent data from the Organization for Economic Co-Operation and Development (OECD), total health expenditure accounted for about 17.7% of US GDP in 2011, which is notably above the average of 11.9% reported by other OECD countries. Despite decelerated growth from 2008 to 2010, total health spending has increased each year during the five years to 2013, with an estimated average annual growth rate of 3.9%. In comparison, US GDP has grown a marginal 1.0% per year on average during the same period.

In spite of many uncertainties associated with healthcare reform, the healthcare sector is poised for strong growth during the next five years. This growth will be exacerbated by the expanding pool of aging baby boomers and the millions of newly insured individuals, as well as new technologies and regulations. Medicare and Medicaid spending, in conjunction with improving disposable income, will make healthcare more affordable for individuals. In the five years to 2018, total health expenditure is projected to increase at an annualized rate of 5.9%, faster than US GDP, which is forecast to grow 3.2% per year on average.

During the five years to 2018, the number of people aged 65 and older is forecast to rise an average 3.1% per year to 51.3 million, making up about 15.5% of the total US population. As such, industries that serve the elderly, such as home care providers and elderly and disabled services, are anticipated to record strong revenue growth, averaging 5.2% and 8.1% per year, respectively. The aging population and the rising prevalence of chronic diseases will continue to fuel revenue growth. More than 130 million Americans experience chronic diseases, and this number is expected to escalate in the coming years as more baby boomers age and are diagnosed with diseases like congestive heart failure and coronary artery disease. These industries will further benefit from the continued shift away from institutional care toward home care, which is perceived as a more cost-efficient treatment option for public and private payers.

Furthermore, the increasing focus on preventative care and expanded insurance coverage will increase demand for healthcare services. Beginning in 2014, health insurance carriers will be required to cover essential health benefits, including emergency care, mental health services, chronic disease management and prescription drugs, among others. For example, the Diagnostic and Medical Laboratories industry, which provides analytic and diagnostic services like pathology and diagnostic imaging, is forecast to record annualized growth of 4.9% in the five years to 2018, reaching $61.6 billion in revenue. This growth will be underpinned by increased patient access to industry services, as well as the aging population and a rising number of tests that are readily available for cancer and infectious diseases. The development of more specialized and sophisticated diagnostic tests and medical devices will yield more accurate results and boost demand for medical testing and procedures.

To meet escalating demand, the overall healthcare sector is projected to add about 2.2 million jobs, making it one of the biggest contributors to employment growth in the next five years. Although the healthcare sector has a healthy outlook, its growth will not come without pains; healthcare providers will face some headwinds as the rising shortage of physicians and nurses increasingly becomes a problem in the coming years. Amid the surging scarcity and complexity of healthcare provider jobs, on top of extensive medical education and training, wage costs are anticipated to escalate as companies seek to ensure sufficient supply of providers and retain highly skilled medical personnel to care for the growing elderly population.

US GDP

Home sales

While housing was easily the hardest-hit sector of the economy during the recession, it is also on its way to recovery. In 2013, the number of total existing home sales is expected to reach 5.2 million, which is still stubbornly lower than the historical highs, indicating room for growth in the construction of new homes. During the five years to 2018, existing home sales are forecast to recover 6.9% per year on average to 7.2 million due to rebounding demand and the Federal Reserve’s commitment to low interest rates, which will flow through to mortgage rates and help make homes more affordable. The recovery of the housing market is expected to reverberate throughout other sectors of the economy, fueling the growth of downstream industries.

Although the vast majority of industries in the home sector are projected to grow in line with the overall economy, there are a number of industries that will surge ahead during the next five years. For example, the Home Builders industry, which comprises firms that are engaged in the construction and remodeling of houses and other residential buildings, is forecast to record revenue growth of 8.3% per year on average in the five years to 2018, with a 14.1% spike in 2014 alone. The current upswing in the US economy, along with mounting demand for new housing due to population growth, new household formation and rising rental rates, will spur industry growth. Home builders will further benefit from favorable housing affordability, government subsidies, support to first time homebuyers and lower supply due to the slowed construction that occurred during the recession. As residential and nonresidential construction markets continue to rebound in the next five years, the pool of clients in need of landscape maintenance and installation services will expand, resulting in annualized revenue growth of 5.9% for companies operating in the Landscaping Services industry. Further, improving economic conditions will boost consumers’ and businesses’ ability to pay for professional landscape maintenance as more new single-family homes, shopping centers, corporate and institutional campuses and hotels are built.

While the Real Estate Sales and Brokerage industry did experience the pinch of the recession, it has made a comeback from the brink, driven by sustained low mortgage rates for homebuyers coupled with consistently rising housing prices. In the five years to 2018, industry revenue is forecast to grow at an annualized rate of 4.1% to $128.8 billion. This growth will result from rising consumer spending, which will drive business expansion and investor confidence in real estate and, thus, boost commercial transaction volumes. The shrinking inventory of existing homes in the market will underpin new construction to satisfy rising homebuyer demand. As such, existing home sales are anticipated to grow steadily because home construction will drive transactions for just-built properties and replenish the inventory of listings each year. Furthermore, favorable interest rates, along with available cash reserves and rising corporate profit, will encourage individual investors and institutional investors like pension funds and real estate investment trusts, which seek more significant returns on investment, to pour capital into the commercial real estate market.

Consumer spending on durable goods

After nearly 30 consecutive years of positive growth, the financial meltdown and subsequent recession caused consumer spending on goods and services to plummet. The most recent financial crisis caused cash-strapped consumers to tighten their purse strings and delay purchases of discretionary products and services until better days. However, as the economy has begun to recover, consumer spending has rebounded. This growth is partially the result of pent-up demand for durable goods like cars, which consumers scaled back on during the downturn. In addition, the falling unemployment rate and a brighter economic outlook will further boost consumer sentiment and, thus, encourage consumers to open up their wallets again to spend.

In 2013, IBISWorld estimates that new car sales will hit about 15.5 million, which is much higher than the recessionary low of 10.5 million. Because vehicles are considered a durable good, meaning consumers typically only purchase them when they feel secure with their financial condition, new car sales plunged at double-digit rates as the economy went into the recession. Consequently, industries like new car dealers and car and automobile manufacturing experienced the pains for weakening demand, with revenue tumbling at double-digit rates.

Fortunately, durable goods suppliers were able to get back on their feet as the economy slowly gained traction, consumer sentiment increased and more financing options became available. These factors unleashed held-back demand for durable goods, including new car purchases. IBISWorld estimates that the Car and Automobile Manufacturing industry’srevenue will grow at an average annual rate of 2.4% in the next five years, with an anticipated 8.6% spike in 2013 alone. Automakers will continue to take advantage of increasingly popular hybrid and fuel-efficient cars, including electric vehicles, and cater their products to emerging economies like China. Consequently, new car sales are projected to continue rising an average 1.5% per year, reaching an estimated 16.7 million vehicles in the five years to 2018. Once disposable income and consumer confidence begin to grow in line with the expanding economy, the auto sector will return to precession levels.

Industrial production

The industrial production index (IPI), which measures the pulse of economic activity within the mining, manufacturing, electric and gas industries, is another major contributor to economic growth. From 2002 to 2007, production activity was booming as American consumers enjoyed a steady increase in incomes and, thus, bolstered additional demand for products. However, the financial crisis and real estate bubble staggered investor and consumer confidence, causing IPI to plunge 11.3% in 2009 and resulting in the overall marginal annualized growth of 0.5% during the five years to 2013. A number of manufacturers experienced double-digit contractions in revenue as the recession triggered an abrupt halt in the production activity.

During the past four years, the production index has gained ground, but it remains below its prerecession peak. Although the production at the national level will rise, not all producers will be impacted the same way. Industries involved in transportation equipment, chemicals, pharmaceuticals and electronic equipment manufacturing are projected to grow more quickly. For example, the Generic Pharmaceutical Manufacturing industry is projected to record annualized revenue growth of 5.2% in the five years to 2018. The rapidly aging population and increasing pressure from insurance companies to reduce healthcare costs will continue to drive demand for generics. In addition, patent expirations on major blockbuster brand-name drugs and healthcare reform’s efforts to increase access to low-cost generic drugs will further fuel industry growth.

Meanwhile, the Oil Drilling and Gas Extraction industry is anticipated to grow 2.2% per year on average to $319.5 billion during the next five years. This growth will be fueled by the rising proliferation of hydraulic fracturing (“fracking”) techniques to extract previously nonviable sources of natural gas and oil, which are expected to expand US crude oil and natural gas production and make the United States the largest producer of crude oil by 2020. At the same time, growth in production activities will spur demand for environmental consulting as businesses, especially those that operate in high-polluting industries like energy and manufacturing, are increasingly focusing on environmental sustainability. Companies’ willingness to stay abreast of stricter regulations and the pressure to appear more environmentally friendly will propel the growth of the Environmental Consulting industry, with revenue forecast to increase 5.9% per year on average in the five years to 2018.

While the manufacturing sector continues regaining its momentum at a faster pace than anticipated, IBISWorld estimates that it will be a several years before it returns to healthy levels. The recession has been a wake-up call for many businesses, and, thus, they are not expected to be as willing to ramp up production. Over the next five years, the ability of American manufacturing companies to expand capacity will be restrained from competition stemming from low-cost producers in emerging markets, as well as a forecast rise in interest rates that will increase capital expenditures and potentially deter the building of new facilities.

While some industries will continue growing in line with US GDP during the next five years, IBISWorld projects that there will be a number of industries that will outperform the overall economy. As consumers and businesses gain confidence in the economic outlook and revive their spending and investing activities, production and construction activity is expected to pick up its pace, propelling growth in other sectors. The healthcare sector alone is expected to expand tremendously on the back of the rapidly aging population and millions of newly insured patients that will demand healthcare services. In addition, technological developments and cost-containment pressure will encourage businesses to invest in environmentally sustainable activities in the coming years.