Third quarter GDP growth lags again

Another disappointing (but not surprising) GDP report for the US in the 3rd quarter: up 2%, slightly better than 1.7% in the 2nd quarter but nowhere near the 3% plus rates needed to bring down unemployment.  WSJ reports that much of the growth came from businesses expanding inventories, investing in equipment and structures.  Household consumption grew 1.8 percent, the highest rate since 2006.  For more details, see the press release from the Bureau of Economic Analysis. 

Economic tips for weight-conscious Thanksgiving diners

Dan Ariely, a behavioral economist at Duke, provides suggestions on how to avoid unnecessary calories on Thanksgiving day in an NYT blog entry. One I had not thought of: "Move to chopsticks!"

What does the GDP report really mean?

News that GDP grew by 3.5% in the third quarter is definitely welcome after four straight declines. A careful look at the major components in NYT and WSJ shows that stimulus has played a role. Consumption increased with a big help from cash for clunkers; investment grew because of an uptick in housing ($8k tax credits at work) and restoration of inventories. Net exports fell, whereas federal spending was up (no surprise there). More details are available in the Bureau of Economic Analysis press release.

There is still plenty of room for concern. Cash for clunkers boosted sales in the short term, but many economists (myself included) believe that the program merely accelerated purchases that car buyers were going to make anyway -- which is not good news for the next few quarters. The employment news continues to be bleak, as noted in a recent post. But +3.5% beats a negative number!

Choices in health insurance

Excellent article in today's NYT by David Leonhardt on employer-provided health insurance. Leonhardt makes an important point about how individual choice is always going to be curtailed when most people get their insurance from either their employer or the government. Some people are risk averse and want insurance with low deductibles and copays; others are more willing to take risks (or have more personal wealth to cover downside risk) and prefer very large deductibles. Regardless of risk aversion, all parties want to take advantage of the tax subsidy provided to employer-provided insurance. However, employers generally negotiate for one plan to cover everyone, and in our low-savings society the low deductible plan will win out in almost every case. Customer service also suffers since customers cannot threaten to take their business elsewhere.

The immediate advantage would be that people could choose a plan that fit their own preferences, rather than having to accept a plan chosen by human resources. You would be able to carry your plan from one job to the next — or hold onto it if you found yourself unemployed. You would never have to switch doctors because your employer switched insurance plans. The longer-term advantage would be that health insurance would become fully subject to the brutal and wonderful forces of the market. Insurers that offered better plans — plans that drew on places like the Mayo Clinic to offer good, lower-cost care — would win more customers. “That’s the way the rest of the economy works,” says William Lewis, former director of the McKinsey Global Institute.

No green shoots in retail

Most economists, including myself, are fairly confident that the economy has at least bottomed out. The report on retail sales that came out yesterday (WSJ gated, NYT ungated) indicates that the recovery is not going to start with a consumer rebound. No retail sector seems immune; Target down 6%, Saks down 15%. Retail execs do not expect matters to improve for another year; some chains are cutting back further on inventories and cutting back holiday orders.

The other candidates for driving the recovery are investment, exports and government. Investment has three major components: plant and equipment, housing, and inventories. Housing has been doing slightly better the last three months, but I would not place any bets on a housing resurgence any time soon. Will firms be willing to invest in big ticket items and inventories if consumer spending stays flat? Don't count on it. As for exports, they are driven by GDP growth in other countries (which actually is looking up) and the exchange rate. This has some potential.

The stimulus package will start kicking in later this year and next, so we can count on government spending to give a short term boost to the economy. But looking at the last 80 years of macroeconomic data, I cannot find any instances of a sustained economic recovery driven by government other than possibly World War II. Let's hope for better news from consumers soon!