Interest Rates and Employment: The Taper's Well Camouflaged

Protect Tapirs: http://www.tapirs.org

Tapirs are well-camouflaged. So's the taper: you have to look for it. That should not be surprising to anyone who lets their view of the world be affected by data, rather than the pop version of a simplistic model.

...the taper's well-camouflaged...

First, the data; I present 1 month, and 1-, 5-, 10- and 30-year interest rates, pulled from the Treasury's Daily Yield Curve web page. Interest rates are certainly up over the nadir of 2012, but casual reading of the graph suggests at best a modest impact (see the Wikipedia entry on the three US rounds of "quantitative easing", or the analysis of economist's such as that of James Bullard at the St. Louis Fed). In the background of course is the continued slow growth of the economy, which at its current pace of job creation will take until 2019 to bring us back to normal. Meanwhile, there are no signs of an uptick in inflation (and in Europe, a few whiffs of deflation).

Mitsubishi Motors: Going, going ... gone?

Mitsubishi Motors Corporation (MMC) is trumpeting record profits. I'm not convinced things are so rosy: they've also just restructured debt, with its four main creditors – and largest shareholders – taking an average 25% haircut on their preferred shares, to the tune of ¥95 billion (US$950 million), something made clear only in its Japanese-language filings. Perhaps they want a tax writeoff and figure their last bailout won't be recouped. But it also provides MMC with a clean ownership structure that would make a sale easier. Whether anyone would want to buy them is less clear: the company has a stormy history that includes 2 failed sales and an unenviable strategic position. They aren't unique in this; many other small firms have failed or changed hands in the past half dozen years. But they're more likely to be a Saab story than any of the other Japanese bit players.

...they're more likely to be a Saab story than other Japanese bit players...

Mitsubishi Motors' origins saddled it with an inefficient structure. During World War II Mitsubishi Heavy Industries (MHI) made munitions ranging from warships to the Zero fighter. After 1945 the US Occupation split up the firm into 3 pieces, each of which made different sorts of motor vehicles – three-wheeled cars, scooters, commercial trucks – as they struggled to find things to sell in the grim 1940s and early 1950s. After the Occupation ended MHI's former pieces merged. The end result was the Mizushima plant in western Japan producing minicars ("kei" cars), Okazaki in central Japan making passenger cars, and Maruko in Tokyo (eastern Japan) making trucks, all within the larger MHI with its industrial machinery, shipbuilding and heavy equipment operations.

VW, UAW

While I prepare a post on Mitsubishi Motors (I began going through financial statements a couple weeks back) let me point to a post by Jared Bernstein on ironies with the labor movement today. His contention is that we see pro-business, government-shouldn't-constrain us conservatives trying to constrain the ability of VW to invite in the union. Consistency is apparently for small minds. Behind the Veil

Two Further LF Graphs

While I continue to work on a blog post on Mitsubishi Motors, let me put up two further graphs on employment by age bracket, broken into (i) older workers and (ii) younger workers with January 2007 as a base. (I won't post details, but using a different base does not change things.)

First, since the share of older workers in each age bracket rises, the drop in LF participation is not due to a larger share of workers taking early retirement. Indeed, the data show just the opposite, that older workers are more likely to stay in the labor force than before the recession. (This is not a recent shift. Age breakdowns are available starting in 1994; older worker participation was rising by the late 1990s, but without a longer time series, I can't preclude that change having started earlier. Nor can I get a breakdown by gender on the BLS web site, though the BLS can likely generate those numbers.) Oh, and for a nice analysis of survey data on why people were not in the labor force, see Ellyn Terry's post on the Atlanta Fed macroblog, "What Accounts for the Decrease in the Labor Force Participation Rate?"

(un) Employment

The latest Current Population Survey (and Current Employment Survey) data show a labor market that barely grew, once you account for demographics. Earlier posts (most recently Auto Recovery, yes ... but as for the rest) provide snapshots of employment and employment corrected for involuntary short hours, both relative to an employment-propensity weighted population projection. Here's another cut, shifts in age-specific ratios of employment to population. That helps correct for

Hotelling redrawn: party dilemmas in a primary system

In August I posted an Economic Model of Elections. The new academic term began today, and the class following mine was preparing to look at a version of that model as their intro topic. Then a colleague stopped in and we chatted about the same thing. As a result I redid my graphs. First, the basic Hotelling model (dating to 1929), or to political scientists the median voter model, predicts centrist politics in a single member, one vote per person electoral system. All vote for the candidate closest to them in political stance. Candidates who try to stake a position away from the center get trounced, as their opponent will move closer to their position and pick up more than half the vote.

In the US national elections come after party primaries. While there are splinter parties, there are only two main parties, as seems to be the case in all (mature) single member district systems (Duverger's Law).

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...