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US auto markets are critically important to chemists and the chemical industry.  They represent our largest single market and are worth around $60bn in chemical sales, with each auto using around $3500 of chemicals.

Today, as with housing (which I discussed a year ago), the auto market seems to be hitting a cyclical peak, with many players expecting a downturn next year. This would not be unusual, as the chart highlights.  It shows housing starts on the vertical axis versus auto sales on the horizontal axis. It suggests the industry has gone through 4 distinct phases over the past 40 years:

 

  • 1973-84, very volatile, purple. Housing starts and auto sales saw strong volumes in 1973, 1976-9, but crisis levels in 1974-5 and 1980-2
  • 1985-98, very stable, green. Auto sales were generally rising, whilst housing starts were plateauing
  • 1999-2007, Y2K and sub-prime mania, red. Easy money pushed auto and housing volumes to unsustainable levels
  • 2008-16, slowing demand, blue. Low interest rates initially supported a slow recovery in housing and auto sales, but housing starts stalled after 2014 at half the peak subprime level, although auto sales continued to rise

 

What is particularly noticeable is the way that auto sales really began to pick up from 2012, as manufacturers chose to support sales growth via a major extension in the average length of auto loans to a record 5.6 years – thereby reducing monthly payments and making cars more affordable.  Unfortunately, as we saw with the subprime disaster, increasing the number of loans generally means lowering their quality, as credit analysts Experian report:

 

  • Total auto loans reached $1.02tn in Q2 2016, up 22% from Q2 2014
  • The average loan for a new car is now $30k
  • Loans financed 87% of all new auto sales, with 31% using leases
  • Deep subprime loans are up 12% YTD, as lenders maximise interest income
  • The longest loans (up to 7 years) also have the lowest average credit score

 

Now we may be moving into pay-back time, with JPMorgan Chase CEO Jamie Dimon warning that “Auto is clearly a little stretched, in my opinion, someone is going to get hurt”.

One sign of the possible downturn is that auto sales fell 1% in Q3 versus 2015, despite a major increase in incentives.  These rose by $400 per vehicle to an all-time record of $3888 – higher even than in December 2008.  The average car sold over the Labor Day weekend was discounted by 10%, as dealers cleared unwanted inventory. In addition, there appears to be growing competition from the used car market.  All those new cars sold on leases since 2012 (with typically a 3-year term) are now starting to be handed back.  2016 is seeing the number of cars coming off-lease rise by more than a quarter – helping to explain the growing pressure on new car sales and pricing.

There is also a more fundamental question emerging over the long-term outlook for auto sales.  This was foreshadowed back in 2011 in a TED talk by Ford’s chairman, Bill Ford, where he warned that a “business as usual” strategy would inevitably lead to gridlock, and noted that:

“The average American spends about a week a year stuck in traffic jams, and that’s a huge waste of time and resources….

Chemists therefore perhaps need to prepare for not just a cyclical auto market downturn in 2017, but something more fundamental.  I will return to this topic, and what we can do to boost employment despite these adverse trends, in a later post.

 

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Paul Hodges is chairman of International eChem (www.iec.eu.com), trusted advisers to the chemical industry and its investment community. He is a member of the World Economic Forum’s Industrial Council on chemicals, advanced materials and biotechnology, and presents the ACS ‘Chemistry & the Economy’ webinars.

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All that I know is that I know nothing (sometimes referred to as the Socratic paradox).

 

I know how Socrates felt.  Recent research uncovered a new paradox that worries me, one that questions my thought processes.  It is certainly not the only paradox that causes me concern. 

 

I confronted the paradox of plastic in my compost pile.  The paradox of plastic is that one of the advantages of plastic is that it lasts forever and the disadvantage of plastic is that it lasts forever.  Future archeologists will be perplexed by plastic.  Archeologists for generations found artifacts that were the special things, those made of largely immutable gold or stone.  Care was put into the craftsmanship knowing that they would last forever.  Plastic, like gold, can last for centuries.  It is cheap, not at all rare, and allows all matter of things to be made.  Cheap plastic trinkets will last for millennia, confusing future archeologists trying to assign some significance.

 

Biodegradable materials, it would seem, would be a solution. Paradoxically, people are more likely to litter when an item is biodegradable.  I myself think nothing of tossing a wooden toothpick into the shrubbery, but would never toss a plastic item the same way.  Cigarette butts are surprisingly common litter.  Studies have shown that the perception that cigarette butts are biodegradable grants smokers carte blanche to flick them anywhere they please.[i] A UN study concluded that “labelling a product as biodegradable may be seen as a technical fix that removes  responsibility from  the individual.  A perceived lower responsibility will result in a reluctance to take action.  A  survey of  littering  behaviour in  young  people in  Los  Angeles revealed  that  labelling a  product  as ‘biodegradable’  was  one of  several  factors that  would  be more  likely  to result  in  littering behavior.”[ii]  California went so far as to ban the labeling of plastics as biodegradable.[iii]  The paradox of biodegradability is that it leads to litter.

 

Sam Peltzman is credited with noting that added safety equipment leads to more accidents.[iv] Pelzman made his paradoxical observation for automotive safety.  I wouldn’t connect wearing a seat belt directly to more risky driving, but I have certainly observed many cases of personal protective equipment leading to riskier behaviors.  The paradox of added safety equipment is that it invites riskier behavior, leading to more accidents.

 

Crashes of cars on autopilot likely aren’t a manifestation of Peltzman’s paradox, but of the Yerkes-Dodson law.[v] Paradoxically, give a person too little to do and they become complacent. They stop paying attention.  The fix isn’t easy, since, giving someone too much to do overwhelms them and diminishes performance.  Texting while driving being an easy example.   Adding safety equipment, since it encourages distraction, may, paradoxically, actually make us less safe.  Alfred Nobel famously confronted this with the one-legged stool. Making nitroglycerin required an operator to watch a slowly changing temperature while feeding nitric acid. The one legged stool was the way operators were kept alert and awake given the mind-numbing task of slow addition.

 

Ivory and rhino horn are currently both in the news since proposals to farm them seem to be gaining momentum.  Conservation, it is argued, begins by placing a value on a resource.  Public markets define the value and banning the trade of ivory and rhino horn creates a clandestine market.  Clandestine markets rely on breaking laws, such as by poaching.  Opening the market to sustainably harvested materials will cause the value of the elephants and rhinos to increase.  This logic is quite similar to the forestry paradox.  Strange as it seems, it is argued that the best way to save a forest is to cut down the trees.  The paradox hinges on strong markets for wood providing incentive for land owners to keep forested land as forest, managing and harvesting the wood for maximum value. Paradoxically, cutting trees ultimately saves the forest.

 

Jevon’s paradox is equally troubling.  Jevon’s noted that increasing efficiency actually led to more consumption of coal.[vi] Jevon’s paradox, first noted the year the U.S. Civil War ended, prompted over 150 years of arguments.  Studies dissect Jevon’s paradox, or the rebound effect as it is sometimes called, into a summation of effects.  Efficiency increases cause a drop in consumption, leading to a drop in energy prices.  Lower prices lead to more use in what is labeled the direct effect.  Dropping energy prices increases liquidity leading to more consumption of other goods and services, creating an indirect increase in overall energy use.  Other effects have been identified, but are variations at a macroeconomic level of the direct and indirect effects.  No matter how it is sliced and diced, the conclusion is often that we squander efficiency gains, paradoxically using more energy overall when technology improves efficiency.

 

The most troubling paradox is one I ran across most recently.  The Science Literary Paradox is based on the observation that the best educated and most scientifically literate are the most prone to ignore the power of data to inform decision making.  In particular, in politically contentious debates, where science is at the core, the most well-read among us are most prone to what authors call motivated reasoning.  Motivated reasoning is when political or other beliefs trump scientific facts.[vii]  It seems that we are pretty good at finding data that support our world view, ignoring data that disagree.  The most educated among us are, paradoxically, the most willing to ignore data and stick with entrenched beliefs.

 

Public policy discussions rely on scientific data frequently, and seemingly at an increasing frequency.  The GMO debate, the use of vaccines and climate change are just some of the issues we face where a scientific foundation looms large. Discussions inevitably conclude that better education is the solution to resolving differences.  Sadly, the Science Literary Paradox points to education being more effective at solidifying entrenched positions. Recognition of the paradox can have a silver lining. The first step in fixing a problem is recognizing the problem.  Assume the paradox is real and take action.  Be more diligent in allowing the power of data to influence your opinion. I know I will.

 

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Mark Jones is Executive External Strategy and Communications Fellow at Dow Chemical since September 2011. He spent most of his career developing catalytic processes after joining Dow in 1990. He received his Ph.D. in Physical Chemistry at the University of Colorado-Boulder doing research unlikely to lead to an industrial career and totally unrelated to his current responsibilities.

 


[i] Kaufman, Leslie; “Cigarette Butts: Tiny Trash That Piles Up”, The New York Times, MAY 28, 2009. 

[ii] United Nations Environmental Programme (UNEP); "Biodegradable Plastics and Marine Litter. Misconceptions, Concerns and Impacts on Marine Environments",  November 2015, http://unep.org/gpa/documents/publications/BiodegradablePlastics.pdf

[iii] SB-567 Recycling Plastic Products (2011-2012).

[iv] Peltzman, Sam. "The Effects of Automobile Safety Regulation." Journal of Political Economy 83, no. 4 (1975): 677-725. http://www.jstor.org/stable/1830396

[v] Barry, Keith; "Too Much Safety Could Make Drivers Less Safe", Wired, 27 July 2011. 

[vi] Gillingham, Kenneth, et al. "Energy policy: The rebound effect is overplayed." Nature 493.7433, 24 January 2013: pages 475-476.

[vii] Nisbet, Michael; “The Science Literacy Paradox”, Skeptical Inquirer, Sept/Oct 2016, pages 21-23.