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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (49376)	4/8/2006 12:32:54 AM
From: regli	Read Replies (1) \| Respond to of 116555

I don't have a problem with them revising their basic calculations based on better and more detailed data. However, even there, I don't understand why the trade-in value is considered in a new car's valuation. The used car market is likely driven by a different though potentially related set of variables. As there is already a separate index for used vehicles, I think this adds to the potential of double counting. bls.gov "The average actual price that consumers paid for a vehicle was about $24,000 and rose noticeably between 1999 and 2003. By 2003, the overall average selling price (ASP) was $25,000, and the ASP for trucks was more than $4,000 larger than that for cars. From 1999 to 2003 (on a December to December basis, not shown in the table), the overall ASP rose 2-1/2 percent per year. Excluding incentives, the ASP of vehicles rose 3-1/2 percent per year. With regard to financing during the 1999 to 2003 period, the average interest rate received for new vehicle loans peaked in 2000 at 8.2 percent but fell subsequently to an average of 5.4 percent in 2003. Over the same period, the average loan term for dealer-financed loans rose from about four years to nearly five years. Low interest rates and longer terms allowed consumers to keep monthly payments low even as the average amount financed rose. From 1999 to 2003, the average amount financed climbed almost 13 percent, while the average actual price paid for a new vehicle increased 6-3/4 percent...." Here we have the essence of what happened: ASPs increased 2 1/2% per year and actual prices increased 6 3/4%. Now it gets interesting: "The new trim levels were also disproportionately concentrated among SUVs and consisted of upgrades in interior finishing and electronics (such as navigation systems), larger engines, or other driving and safety features. ..." And now we get to the real meat: "Although the size and variation in the resulting estimates of quality change are substantial, when we base our calculation on the actual price and the second matching assumption (our preferred measure), we find that the average annual pace of quality improvement from 1999 to 2003 was nearly 6 percent per year. Our estimates of quality change can be compared with those that Bils (2004) constructed from micro CPI data. In that paper, the author argues that, contrary to current BLS methods used for constructing price indexes for most goods, forced product substitutions should be treated the same way that scheduled substitutions are treated--with price changes across substituted models viewed as quality upgrades.23 This suggestion is closest to following our matching assumption that treats every model-year vehicle as a new product. For motor vehicles, Bils finds that prices for matched models declined an average of 3.3 percent per year from 1988 to 2003, a result that when combined with the 4.0 percent increase in unit prices over the same period, implies that quality advanced 7.3 percent per year. This figure is much faster than the 2.9 percent rate implied by the current BLS methodology for motor vehicle price indexes. As noted earlier, using our data on actual prices, we find that the matched-model index that treats every model-year vehicle as a new product declined by nearly 6 percent per year, on average, from 1999 to 2003. Coupled with the 2-1/2 percent increase in average selling prices, this result implies that measured quality increased nearly 8-1/2 percent per year, a figure very close to Bils’s estimate for the longer sample period. If the measure of price less cash rebate measure is used, then our estimate of quality change is nearly identical to that derived by Bils. ..." This means that we will soon see prices of cars in the CPI become 6% cheaper every year as a result of "quality" improvements. IMO this is utterly silly. I fully support their financing and rebate adjustments as these reflect real world cheaper prices. However, the quality issues are where this gets highly dangerous and subjective. "upgrades in interior finishing and electronics (such as navigation systems), larger engines, or other driving and safety features." Here again I have my question as posed in prior posts on this topic: What is the objective that these "quality improvements" measure? And in what context are they measured? Does an "upgrade in interior finishing" result in better productivity, higher safety or some other unpublished criteria? Does a "larger engine" result in higher productivity or less safety? Why is a smaller engine by BMW valued differently then than a bigger engine by a Detroit brand? Why not measure overall horsepower in comparing all cars? If safety features are considered in this calculation then why not value a car with lower horsepower higher than one with more power as it likely incurs fewer accidents? What role does speed play in the CPI in a country with speed limits just about everywhere and in that same context what role do road conditions play as they clearly affect the utility of a car? Why is interior trim more important than stop and go traffic in the CPI evaluation? Without broad based objectives and measured criteria, all of these "improvements" are subjective and confined to single brand and even model. To derive an overall CPI figure from such a methodology is simply fooling the public. We will soon now adjust the price of cars down 6% a year even though the real price increased by 2 ½% using criteria that have no very little basis in real world usage and subjective criteria that in most cases doesn’t even cross models or brands. Every social security recipient should be climbing the walls and protest!