Goldman is pegging the odds at 40%. Those seem a bit high to me. Now it could be that they have a more sophisticated gasp of the effects of a European Implosion than I do.
However, I have a hard time getting there from here. You would have to believe that the exports channel is going to be really big for the Untied States and that it will not be offset by the gasoline channel.
I still think the Fed can do more to promote recovery including extending low interest rates to 2015. I also think the fiscal authorities could do more, particularly through expanding and extending the payroll tax cut – business side as well as worker side.
However, even in our current state its just hard to piece together a recession.
Look at these vehicle fleet dynamics
The center of the distribution is moving rightward. This means not only is our vehicle fleet rapidly aging but that if vehicle production actually fell the scrappage rate would skyrocket in the coming years.
You would have the mass of cars headed towards obsolesce. Is this what is going to happen? Its hard for me to see how it is.
This is something we should talk about more but an export oriented economy like Japan could easily get trapped in a very long liquidity trap, especially when you add a rapidly aging workforce to the mix.
However, a relative young and import oriented society like the US is going to have a much harder time staying stuck.
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Tuesday ~ October 4th, 2011 at 5:25 pm
rjsigmund
with the median income per worker now down to $26,197, where are they gonna get the money to make ends meet, much less to buy new cars?
http://www.census.gov/hhes/www/cpstables/032011/perinc/new01_001.htm
Tuesday ~ October 4th, 2011 at 5:46 pm
Andy Harless
“You would have to believe that the exports channel is going to be really big for the Untied States and that it will not be offset by the gasoline channel.”
1. It’s not just the exports channel; it’s also credit: a financial crisis in Europe could spill over to the US financial system. Also, the exports channel isn’t just exports to Europe: the dollar would likely benefit from a collapse in the euro and from the flight to quality which accompanies a financial crisis — which would make US goods less competitive worldwide, including domestically (i.e., relative to imports).
2. I have trouble believing that the gasoline channel is all that big. I remember reading an article in Barron’s around November 2008 that was touting the effect of the huge decline in gasoline prices that had taken place. I was rather skeptical at the time, but even then I underestimated the extent to which the gasoline channel would be swamped by the aggregate demand shift. People don’t change their habits quickly: the short-run impact of lower gasoline prices is marginal, while the short-run impact of weaker demand and tighter credit — which force people to change their habits quickly — are considerable.
Wednesday ~ October 5th, 2011 at 12:03 am
JazzBumpa
It’s not about What’s happening in Europe. It’s about U6 at 16% for years, a new car costing about as much as that median income, a large backlog of underwater mortgages, and the top 1% sucking the life out of the rest of the economy.
The age of the fleet might be an incentive to purchase new, but it does nothing for ability to pay.
And, BTW, the payroll tax cut – underfunding SS at a time when partisan ideologs want nothing more than to destroy it – is still one of the worst ideas EVER!
Sadly,
JzB
Wednesday ~ October 5th, 2011 at 10:23 am
Y. Alekseyev (@yalekseyev)
Karl Smith looks at the vehicle data and concludes that people will HAVE to start buying cars soon. Similar argument is made with respect to new housing. It’s a version of a mean reversion argument that basically says that the data point to an upside down bubble and it’s not sustainable. I am sympathetic to this line of reasoning and would like nothing more than for things to play out the way Karl sees it. But living standards can actually decline! More specifically, it’s possible that a poor and a less employed nation will buy fewer cars, houses, refrigerators and other stuff per capita than before. Not forever, probably, but for a really long time. Longer than me or Karl would be comfortable with.
Thursday ~ October 6th, 2011 at 1:22 pm
charlie
Just eyeballing the chart, I’d say we could do this for about 5 years.
Of course, what is killing older cars is scrap metal, accidents, and neglect. Mostly accidents. You get into a minor accident in a 97 car and it will be totalled — thanks to insurance.
But if the average age s 10 years, that means about a 2001 model. And You dont’ see a huge drop off until the 97 models. So those 2001 cars have about four years of life yet.
And that is when the 2009 models will be about 9 years old. The secondary market starts to become invisible around then.
Thursday ~ October 6th, 2011 at 1:47 pm
Barry
“You would have the mass of cars headed towards obsolesce. Is this what is going to happen? Its hard for me to see how it is.”
Simple. Many families go from one newer car and one older car to one older (sometimes much older) car.
Thursday ~ October 6th, 2011 at 2:05 pm
donna
I would love to buy a new car, but I have two kids in college. They need new cars, too. One graduates in December. Hey, if my kids get jobs when they graduate, or if college tuitions were lower, we could all get new cars.
My 96 minivan is falling apart. It’s old and broken. But it runs. It gets me around. I can’t replace it, because of the college expenses, even though we are in the 95th percentile of income. How can anyone else afford a new car?
Friday ~ October 7th, 2011 at 3:39 pm
Nathanael
People who can pull it off move where they don’t need cars. The car-free proportion of the population is growing, and has been for a whole.
People who can’t pull it off are going to buy the cheapest used cars they can (cheapest when figuring in fuel costs, perhaps). The new car market is going to be a strictly top-end market for quite some time.
And that top end who can afford new cars is getting smaller and smaller thanks to the kleptocratic “give it all to the 1%” policies. Tesla’s strategy of aiming squarely at the luxury market will probably pay off, but the automakers depending on the mass market will be in a world of hurt for a long time.
Even with people attempting to switch from fuel-inefficient to fuel-efficient cars — there are going to be a lot of fuel-efficient used cars thanks to the people going car-free and the elite switching to electric cars.
Wednesday ~ October 12th, 2011 at 11:03 am
Older Cars Delivering Economic Growth
[...] Karl Smith writes about this post at Modeled Behavior. [...]