tis the season -- or this year, not -- but keep it out of our data

As yet more snow falls, we're reminded ... that it's the start of spring? While this year is colder than any I remember, though not so bad in terms of total snow, it does raise the question of how to interpret economic data. Of course housing starts are down, but they're always down this time of year. Some prices are up and others down, again as in the past. Since it was the most recently updated series -- the new data were released at 8:30 am this morning -- I use the Consumer Price Index as an example.

Promises versus Deliverables: Jeb Bush and 4% Growth

Jeb Bush has set the presidential race pace with a promise of 4% growth. Other contenders, Democratic and Republic, will make similar promises, or perhaps already have – I've not looked. My intent here is to examine the issue, not the man.

In the medium and long run growth rates are about the supply side. Now in the short run demand factors matter, and since we're still in recovery from our Great Recession, we can hopefully have a few years of above-normal growth. My own estimation, taking into account the retirement of the baby boomers, is that we're about 7 million jobs short of where we need to be. Of course the next Administration won't take office until early 2017, and realistically their policies won't kick in until 2018. We're adding jobs at a 2 million per year pace. So if we keep that up, by then we'll be pretty close to normal. Looking at the supply side is thus sensible.

4.0% growth isn't going to happen

Reflections on NADA Week 2015, San Francisco

Ruggles based on a column in Wards
minor additions by Smitka

There was a lot going on in San Francisco in January. The week began with the American Financial Services Association (AFSA) conference. Following that, J. D. Power and Automotive News held conferences on the same day, while at the same time, NADA workshops were in session. There was simply no way to take it all in so I’ll only comment on the high points of sessions I attended.

AFSA:

Notably absent from the AFSA conference was the Consumer Financial Protection Bureau. I got the impression they weren’t invited and wouldn’t have come anyway. Last year, CFPB’s Patrice Ficklin addressed a packed room. Since last year’s event, AFSA commissioned a scholarly study, conducted by the highly regarded Charles River Associates, that isn’t kind to CFPB’s suspect methodology called Bayesian Improved Surname Geocoding (BISG) which CFPB uses to “prove” unintentional “disparate impact” discrimination. One gets the impression that zealots at CFPB see discrimination behind every tree and will stop at nothing to “prove” it. According to the Charles River study as summed up in an AFSA bulletin, “BISG estimates race and ethnicity based on an applicant’s name and census data. AFSA’s study calculated BISG probabilities against a test population of mortgage data, where race and ethnicity are known. Among the findings:

The Current State of Leasing and Residual Based Financing

Ruggles, February 2015

According to the most recent Manheim Market Report, “Lease originations exceeded 3.5 million for the first time since 1999. It will take only a slight increase in 2015 to push new leases above the all-time high reached in 1999.” This is largely the result of Auto OEMs attempting to counteract the negative impact of long term financing, which is also reaching new highs. Both initiatives are efforts by the OEMs to maintain volume and production in the face of rising MSRPs and transaction prices. Increasing finance terms take consumers out of the market for extended periods of time and dramatically decreases the chance the consumer will return to the same dealer and/or manufacturer for their next vehicle.

US Inflation

Here are 4 graphs that give an overview of inflation from the perspective of both producers and consumers. Data are percent change from the same month of the previous year.

On the left is the overall movement, on the right data that excludes food and energy. In other words, if we ignore the recent drop in commodity prices, which is a one-time event rather than a trend, what does inflation look like? (Click on the graphs to enlarge them.)

Japanese Suppliers: May the New Year be Happier!

originally posted at The Truth About Cars, Jan 2, 2015

Go HERE for an index of my posts there

車輸送カルテル罰金、日本郵船７１億円で合意

OK, you probably can’t decipher that. The news – this headline from Yomiuri – is the latest in the supplier antitrust cases that ring the world, from Japan and Korea through the US to Germany. Even China has gotten into the act, slapping fines on firms that charge “excessive” prices for OEM aftermarket parts, though that is a reflection of price discrimination (selling for what the market will bear) rather than collusion.

Fines to date now total $2.5 billion. Even in the auto industry, that’s serious money. Whether we see private antitrust suits (which in the US carry treble damages) is unclear. Will Toyota be willing to go after its suppliers, without whom it cannot produce cars? Will it tighten its purchasing operations, where likely the “ordinary” parts central to collusion have younger, less experienced purchasers?

Oil Economics and the Auto Industry

by Ruggles - from my Auto Finance News column

Drill Baby Drill has finally worked, but only because OPEC cooperated, at least temporarily. Until just recently, increased U.S. production hasn’t resulted in low fuel prices at the pump. There is no good reason for global oil market prices to have stayed so high for so long in the face of dramatically increased U.S. production UNLESS OPEC had curtailed its own production to provide price/supply equilibrium. That has been their modus operandi for decades. OPEC started off with 5 members and now has 12, yet they don’t produce any more oil now than they did in 1973. In that period of time, global population has doubled and oil consumption has almost tripled. It’s not because OPEC couldn’t or can’t produce more. They operate like a cartel, because they are.

Takata and The Quality Dilemma

revised version posted by Smitka at The Truth About Cars

The Takata airbag inflator problems illustrate a fine dilemma: quality standards across the auto industry are good, those for safety-critical devices very good. The result is that only things that occur very rarely get through the production process, and many of those either cause no problem or don't get reported. That makes confirming that there is in fact a pattern challenging, and figuring out the root cause (or causes) extraordinarily so. The number of known deaths (the media suggests 5) is a very small fraction of the number of lives saved by Takata airbags. So the other dilemma is that the fundamental robustness of the manufacturing process means the benefits of a recall are also very low, and the quality of work in your local dealer's repair bay is not equal to that in an airbag plant or vehicle final assembly plant. The cure can be worse than the disease.

Anyway, I spent a day this week with an airbag manufacturer, listening to engineering presentations on a new airbag design from the supplier's senior engineers, with a senior car company airbag engineer also in attendance. I won't name the companies, and what I write is based on information that should be available from public sources. (I spot-checked a couple of the points.)

1. First, globally there are tens of millions of Takata airbags on the road. I've not been able to find a number, but I would guess that over roughly 1 million such vehicles have been involved in a collision that led to an airbag deployment. Of those, to date there are 5 known fatalities and several more injuries. Actual problems are exceedingly rare.

2. The cause is as of yet unknown, as there are multiple failure modes. Which one(s) are leading to the observed problems? Small numbers mean (i) this analysis is intrinsically very challenging. It is complicated by (ii) the evidence going up in smoke when an airbag inflator explodes and (iii) other evidence going up in smoke because documents in Japan were sent to the incinerator. The concentration of incidents in very high humidity locales suggests deterioration of the ammonium nitrate "propellant" due to hydration, wich could cause the sheets of material to turn into clumps (sheets go "whoosh," clumps go "boom"). However there are several incidents in areas not known for high humidity. So there could be two different problems, or one systematic problem and the random one-in-a-million manufacturing defect, or all random problems some of which just happened to be clustered geographically. So last week automakers who use Takata airbags got together to decide how to jointly collect and analyze disparate data in the hopes that the combined data would allow meaningful analysis. This was a meeting cleared by the Dept of Justice as not violating antitrust because it was limited to engineers discussing a narrow set of issues. Almost every car company uses Takata for at least a few airbag applications, so it was basically a meeting of the global customer-side engineering community.

3a. If the actual problem is not systematic, then a recall may do nothing at all except cost lots of money, because the same one-in-a-million bad inflator ratio won't change. If anything, a rush to increase production will make monitoring production process compliance more challenging and could lead to a higher number of (idiosyncratic) random defective airbag inflators in cars.

3b. Again, other manufacturers cannot substitute their inflators for a Takata inflator -- they would have to design a product that matched the gas generation profile needed to match the Takata airbag, verify their method of manufacturing produced parts that actually worked to design, test prototypes with the Takata airbag to make sure there was no unforseen interaction (vent angles or orientation slightly different, lots of subtle interactions). Then they would have to set up a production facility, run off a lot of parts coming through the actual production process on the machines and tooling and inspection processes that would be used (rather than the prototype build process), and have these tested and retested. This is necessary because the bag portion is very, very specific (the exact grade of material and how it is folded are all very carefully specified, tested and then monitored during production for exact replication). It would be very hard to do this in under 6 months, and production does not ramp up from nil to full overnight. It would be impossible to do this in 6 months across all of Takata's airbag-inflator-vehicle combinations, because each would need to be tested separately. Engineers can work 16 hour days for a while, but not for month after month. There isn't excess engineering and testing capacity just waiting for a recall to come along, and car companies want their engineers to continue working on new vehicles, they don't want to stop everything under development to re-engineer an old (perhaps decade-old) product.

If you need to find a needle in a haystack, maybe it's not worth finding the needle.

4. Nevertheless, of the inflator manufacturers, as far as I can tell Takata is the only one whose inflator operations did not start out as a division or factory of a rocket engine or explosives company. Instead Takata was a cut-and-sew operation that had expertise in fabrics that then added in-house pyrotechnic capabilities. That adds to the suspicion of a systematic albeit very rare propellant problem, but again, the number of incidents remains very small and there is essentially no ability to cull the necessary information from incident reports or (when they were kept) piles of shrapnel.

5. For reference, manufacturers of inflators include Autoliv (the other really big player), TRW, Key Safety Systems, Daicel and (making only inflators) ARC.

6. Finally, I want to reiterate that the numbers indicate you are much safer in a car with a potentially defective Takata airbag than a car without any airbag. The Takata airbag defect matters only in a frontal collision. Even if the inflator did spin off shrapnel, which is (order of magnitude) perhaps a 10 in a million chance, the chance you will be seriously hurt is lower. If you don't have an airbag, you'll be using your head -- to slow down the rest of your body. That story never has a good ending, and can readily have a fatal one, the latter at a rate much higher than 10 in a million.

mike smitka, from Toronto

How the Pre-Owned Market is Driving Economic Growth

An interesting theory inviting comments: http://www.cnbc.com/id/102186242

Waiting for the stars to align: Japan's Consumption Tax increase

Japan, as does much of the world, has long-run fiscal challenges. Its population aged faster than anticipated. No mechanism was put in place to automatically adjust pension and healthcare revenues.^{Note 1} In addition, the slowdown of economic growth and the late 1980s bubble and its collapse both meant that revenues plummeted, leaving the economy with a one-time buildup of debt as the aging process commenced. The result was a large initial buildup of debt, and an inexorable subsequent rise.

...right now the stars are aligned around the consumption tax...

Addressing the issue required however the proper alignment of stars. First, the political system had to be configured so as to allow decisionmaking. A long era of prime minister of the season meant that doing much of anything has been a challenge. Then there's the economic system: even deficit scaremongers recognize that raising taxes in a recession is a bad idea.^{Note 2} So Japan also needed to have the economic stars align. For the initial decade or so, the aftereffect of their bubble muted discussion of tax hikes. External shocks – the Asian financial crisis in 1997, worries about spillover from the end of the US dot.com bubble, then 9/11 and 3/11 [the Tohoku megaquake], and more recently the sharp recession touched off by what is known in Japan as the "Lehman Shock" provided excuses to postpone, from the perspective of politicians if not economists.

Then came Abe. He is only the second prime minister in many, many years to not face a constant risk of losing his majority support in the Diet; the political stars aligned. Likewise the economy has been recovering bit by bit from the Lehman Shock and 3/11. While the reality may be something less, weak labor markets that kept youth from launching careers, headlines trumpted the rise of GDP and diminishing deflation. The denoument was that on April 1, 2014 Japan increased the consumption tax (消費税) – its national sales tax – from 5% to 8%. That had a predictable negative impact on growth, and so it remains an open question which way Abe and his cabinet will lean for authorizing the next increase in the consumption tax, a 2 percentage point bump scheduled for October 2015. The legislation is in place, but there is still an opt out.

One metric is inflation. Unfortunately a disadvantage of a large bump – in this case 3 percentage points – is that while it will produce a correspondingly large jump in the price level, the base effect will wear off if the underlying wage and other cost dynamics (and firm pricing power) remain unchanged. So we are now at the point where inflation is trending down. The depreciation of the yen helped hide that, particularly as higher import prices have been sufficient to offset lower global energy prices. But that effect too will wear off. Global headwinds now threaten; China, not the US, is Japan's largest trading partner. (Japan's exports to China of computer chips and the like are incorporated into iPhones and similar goods that are promptly re-exported to the US and ... whoops ... Europe. No out there!) So my sense is that if the economic stars are aligned, that is temporary.

All this begs one question on the nature of the tax increase: why large jumps? Instead of raising taxes by 3 percentage points in one fell swoop, why not raise rates by 0.75 percentage points every 6 months over two years? or (given the 10% end point) raise rates in increments of 0.5 percentage points every 6 months for 5 years?

That would have multiple advantages:

1. Incremental bumps would lessen the surge of big-ticket purchases just before the rate increase went into effect, and the subsequent negative rebound. Such volatility serves no good macroeconomic purpose.
2. Maxi bumps make sales data hard to interpret for the private sector – how much of the March 2014 sales surge was because the economy was doing well and how much was due to consumers pulling purchases forward? Such uncertainty serves no good business purpose.
3. Volatility makes macro data hard to interpret for us economists. Yes, readers are shedding crocodile tears in sympathy, but some economists do have politician's ears (such as Koichi Hamada, a friend of Abe and former University of Tokyo and Yale professor whom I've known for 30 years). If such economists are honest – Hamada is not a mere political hack – then they are surely tempering their advice.
4. Frequent mini bumps would add to inflation for some time to come. Surely that would be better if the goal of policymakers is to shift expectations away from deflation.
5. Mini bumps ought to be more robust politically. You can with good reason argue that, in the midst of a slowing global economy, now is not the time to bump the consumption tax to 10%. It would be harder to argue that going from 8.5% to 9.0% should be postponed.
6. Mini bumps ought to be easier to extend. From a fiscal perspective, even at 10% Japan's deficit will remain large, and at 10% the consumption tax is much lower than in many OECD countries. So why stop at 10%? That's surely much easier to sell if it's a continuation of mini bumps rather than a maxi jump.

Tightening loopholes through strict implementation of a national tax ID system may be the most desirable step. Right now though the stars are aligned around the consumption tax.

 

1. Money is fungible and there is no particular economic reason to run retirement programs on a stand-alone budgetary basis. Having separate retirement and healthcare accounts and taxes to match is however to my knowledge universal.
2. Cutting retirement benefits would have the same net budget impact and the same short-term contractionary impact as a tax increase, though with 25+% of the population already benefitting from Japan's programs, that's politically infeasible. It's also morally objectionable, as the twenty-five-percenters paid taxes during their working lives and so fulfilled their end the social contract. Extending the retirement age is a compromise: those near retirement may be treated unfairly, paying in more and taking out less than they anticipated, but at least the ex post adjustment is muted.