Thursday, December 3, 2009

Why are Durable Goods Suddenly So Expensive?

The graph below shows monthly price indices for capital equipment and consumer durables, though Oct 2009.

Economists know well that these goods have steady gotten cheaper over time. The mystery to me is that, beginning last September, they stopped getting cheaper and even got more expensive (note that the consumer durable price is on a different scale -- it has tended to decline a lot over time -- so the lack of decline is more remarkable there).

While you try to solve the mystery, please note:
  1. volumes produced of these goods are obviously down, but that has been true in previous (ITC-less) recessions and those recessions did not have such price increases (note that my graph includes the 2001 recession). So I don't think the high prices can be blamed on the low volumes alone.
  2. For some items, one might be concerned that the price indices are based on "list prices" and those list prices have (perhaps) been discounted more heavily than usual. I am dubious of a significant "list price" bias because the increases are across broad categories of consumer durable goods, including things like cars, college textbooks, jewelry, and telephones where this bias is either less of an issue OR the BLS is measuring actual transaction prices by acting as would-be purchasers themselves).
  3. Also note that most of the measured sub-index increases are nominal -- I doubt that manufacturers sought to discount their goods by first hiking their list prices.

The ITC is known as the "Investment Tax Credit" -- a credit going to the purchaser of a new durable good. The federal government used it in some of the 1960s and 1970s recessions, but not in the 1980s and 1990s. Professor Goolsbee has convincingly shown that the short run effect of the ITC is to make durables goods more expensive, rather than encouraging investment in them.

"Cash for Clunkers" was a kind of ITC -- a subsidy going to purchases of new cars.

I have warned for a while now that investors may be rationally expecting further ITCs.

I raise all of this because the expectation of future ITCs may explain the price pattern in the chart: producers of durable goods are holding back production until those credits are in place?

Anyway, the point of this post is to hear your ideas, not to insist on the ITC interpretation.


Karl said...

That's fascinating.

As a first wild guess I would say, a sweeping away of elastic demanders.

Suppose that their are two types of buyers rich and poor. The rich buyers are less price elastic. The rich buyers also have a greater ability to self-finance.

Collapse of lending sharply raises the borrowing costs of some poor buyers and causes some to be liquidity constrained. This shifts the market heavily towards rich buyers and results in less elastic demand.

This would presume some monopoly power on the part of durable goods manufacturers. One test would seem to be whether price increases have been stronger among heavily branded goods.

John Booke said...

More foreign exporters selling products to the US are invoicing in their own currency rather than in US dollars.

Doc Merlin said...

There is a dollar crisis that has been building since the early 00's. A lot of countries want out of the dollar game. Look at USDX for example. Thats been in a very bear market recently, and many currencies peg or are strongly influenced by the USD. Currencies try to devalue relative to dollars to make more on exports to the US, but even so the dollar has been falling relative to them.

Joseph said...

Supply and Demand. Manufacturing layoffs/reductions have taken supply off of the market increasing the pricing power of those who remain. Notice pricing are starting down again as demand is waning.

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