Used Car Prices Aren't Sensible

I don't normally link to other blogs, but here is a neat little post on a behavioral economics study of discontinuity in used car prices. There's no particular reason a car with 49,900 miles should be much different from one with 50,100 miles. But that's not what we actually observe. Pricenomics calls attention to a paper by Devin Pope, Meghan Busse, Nicola Lacetera, Jorge Silva-Risso, and Justin Sydnor (2013). "Estimating the Effect of Salience in Wholesale and Retail Car Markets." American Economic Review Papers and Proceedings (103(3): 570-74. As Pricenomies summarizes it in "How We Misprice Used Cars":

The researchers attribute the mispricing to “left-digit bias”. Buyers try to simplify the information available to them by only focusing on what they deem most relevant. And this bias represents $2.4 billion worth of mispricing.

Actually, the paper itself is quite readable. As the co-authors phrase it:

Modern economic life requires individuals to evaluate many pieces of decision-relevant information every day. A growing body of evidence shows that not all information is equally salient to consumers.¹ This is the case even for large-scale purchases made in well-functioning markets such as the market for automobiles...

The short paper above draws on the following, which presents the empirical details of their statistical tests for "irrational" pricing: Nicola Lacetera, Devin G. Pope, and Justin R. Sydnor (2012). "Heuristic Thinking and Limited Attention in the Car Market." American Economic Review 102(5): 2206–2236. That longer article is very much aimed at specialists. Thus prose such as the following:

Motivated by the literature on regression discontinuity designs (see Lee and Lemieux 2010 for an overview), we employ the following regression specification:

mike smitka

The Global Industry: Honda, the US and the Taper

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...bond markets reacted to the taper with a yawn...

The "taper" in practice started with a whimper not a bang. Instead of purchasing a $1.02 trillion SAAR the Fed reduced its purchases to $0.90 trillion – that is, $900 billion. Yes, the announcement suggested additional reductions at each FOMC meetings in 2014, but cutting purchases by $10 per month in several steps means the Fed is still poised to purchase another $500 billion in bonds, while promising to keep short-term interest rates at 0% until we get substantially lower unemployment or higher inflation, which in practice means well into 2015 if not beyond. In reaction, bond markets reacted to the taper with a yawn – rates at all ends of the maturity spectrum, from 1 month to 30 years, shifted 2-4 basis points at long maturities and actually fell out to 3 years. There's no sign that the markets whose entire focus is interest rates expect any effective change in monetary policy. (Indeed, I read it as saying that bond markets don't think taper or its lack matter – while stock prices are driven by the story of the hour and not by data.)

...the US is becoming an export base...

So what's with "global" and "Honda"? First, the dollar has appreciated relative to the yen – Japanese are looking at their domestic interest rates and judge that parking their money in dollars is the better choice. But if Abenomics works, their interest rates will rise. (And if it doesn't, the decline of Japan's domestic auto market will accelerate; see an older post here on the interaction of a falling and aging population on the demand for cars.) But even if the yen stays at its current level, Honda will find it increasingly hard to recruit workers in Japan, and will find little reason to bet on the yen's exchange rate for deciding where to make global models. In that context, it is important to note that Honda has adopted English as its global language, replacing Japanese. Quietly, Honda has also reached the point where it develops market-specific products (for "market-specific" read "North America") in Ohio.

But the dollar has depreciated relative to the Euro and the Chinese RMB, and has strengthened (or at least not weakened) against the Canadian dollar and Mexico peso. The yen exchange rate is an outlier. In that context (Takanobu) Ito, Honda's CEO, notes that the company is expecting its North American operations to export 30%, up from the current 6%-7%. BMW already exports 70% of the output at its Spartanburg SC plant; I expect others to gradually shift in the same direction. Toyota noted that it will export 7,500 Corollas to the Caribbean and Latin America from Mississippi in its initial year of production there, hardly an impressive number but meaning that these vehicles won't be exported from Japan. If you Google firm by firm you'll find similar stories for Ford, Nissan and others. So the word on the street matches US International Trade Administration's analysis of Trends in Motor Vehicle Exports.

Given the lead times in building capacity and making sourcing decisions, such plans could slow if the yen remains sufficiently weak. At the same time, VW's construction of North American capacity means fewer imports from the EU. And in my visits to suppliers – I will visit 5 firms for the 2014 PACE supplier innovation award – I am hearing of plans to add engineers in Southeast Michigan and Northern Ohio.

Now to be honest this has yet to show up in the automotive sector trade deficit. Yet what I would normally expect to see in the data is that a recovery in the US would lead to a sharp upturn in imports without a corresponding shift in exports. We don't see that, either. I don't expect the US to ever turn into the export powerhouse that Japan once was; global growth means that global vehicles will be made in multiple markets. Tariffs in the BRICs reinforce that tendency. We also need to remember that productivity is up, and that manufacturing employment in the US auto and auto parts sector will therefore increase by less than output. Despite these provisos, it's clear that the US is becoming an automotive export base, and continuing to be an engineering center. It's a nice note on which to end the year.

For background, compare US Treasury Yields and European Bond Rates. When the EU begins growing properly – which as with the US may require several years – then interest rates should rise relative to those in the US and make Euro assets more attractive relative to US dollar assets. I thus expect that over time the Euro will appreciate / the dollar depreciate. However, the timing is sufficiently uncertain that investing on this basis is not likely to pay. If it would, then big money would already be doing so and the Euro would already have appreciated ... whatever the weaknesses of the efficient market hypothesis, there is plenty of evidence that such predictable movements get arbitraged away, leaving markets sufficiently unpredictable as to not offer consistently prfitable strategies.

US$-Mexican Peso	US$-Chinese Yuan
US$-Japanese Yen	US$-EU Euro
Auto Sector Imports & Exports, 1965-date	Auto Sector Imports, Exports and Sectoral Trade Balance, 1980-date

The Best Car Ever

Guest post by Blake Grady, edited by the prof with comments from Econ 244 participants. Original was from May 17, 2013.
This is one I had in draft form but apparently forgot to publish last spring – my apologies to Blake and commenters

Tesla Model S

Consumer Reports recently gave the Tesla Model S a score of 99 out of 100, and other media outlets immediately began proclaiming that the car could be the best vehicle ever made. A small number of journalists responded by arguing that the entire idea of a "best car" simply doesn't make any sense.

...the entire [ratings] concept ... makes no sense

Auto Recovery, yes ... but as for the rest

by mike smitka

The US recovery continues at a snail's pace; the auto industry is doing better. The rise in the SAAR [seasonally adjusted annual rate of sales] puts us below the bubble-inflated peak of 2005-6, but given subsequent population growth is at a more sustainable level. Other auto-related indicators show marked improvement, but suggest we still have a ways to go. First, the share of the auto industry (retail and manufacturing) was at 2.3% of the labor force in the late 1990s; it then fell steadily to 2.0% before falling off a cliff in 2008. The nadir was 1.6%; today we're back to 1.8%. That is only about halfway, assuming that other structural changes in the US (the continued growth of healthcare) makes it possible to return to the days of yore.

...automotive employment's only about halfway back...

Beanie Babies for Billionaires

As Mainstreet.com phrases it, "kids love collecting." Think Beanie Babies and Cabbage Patch Dolls. Adults, of course are the ones actually doing the buying of would-be collectible toys. Left to themselves, we – guys, anyway – lean towards baseball cards, comic books and hand tools. Among the monied class the list includes wine, cars and mechanical watches. For them BitCoins are the latest fad. There's a bit of mystique, because the technology behind them is complex, so it appeals to technophiles. There's good marketing, with claims that Bitcoins will be secure, anonymous, and free of any government hand. Ideal for that arms shipment? And above all, there are limited numbers, a function of the mathematics of the system.

There's also a whole make-believe world to go along with them. Markets work perfectly. Ah, maybe not so perfectly - you've got a chance for monopoly! There's a romantic storyline, celebrity twins in the Vinkelvoss brothers and Austrian intrigue over monetary systems in a story that's sufficiently convoluted to permit wild flights of fancy.

...BitCoins are virtually harmless...

China: The Domestic and the Global Industry

In October 2013 sales in China reached 1.92 million units – see the China Auto Industry Association statistics page for details. That's just shy of a 24 million unit rate, and is surely the largest number of vehicles ever sold in a single market in a month. For GM, sales were 282,000 units – 25% more than US sales that month. Everyone is in the market, or preparing to enter there. The Korean neighbors (Kia and Hyundai, but also Daewoo as part of GM), Japan (or at least the Japan Three of Toyota, Honda and Nissan, and Mazda and Suzuki), Germany (BMW, Mercedes, VW), the Detroit Three and now the French, both PSA and Renault. A host of local firms continue, though most as paper entities. Still, Great Wall, Chery, Geely, BYD, Changan and others.

This raises a host of questions. I focus on two: geography and profitability. I frame my brief analysis using the perspective of the OEMs. Since more and more value added lies with suppliers, that may lead to inappropriate conclusions, but for now I will accept the status quo terms of debate.

...the geography of China's automotive industry makes no economic sense...