How holding onto goods longer before replacing them and a global savings glut impact the economy, interest rates and stock returns.
In this episode you’ll learn:
- How a cartel and planned obsolescence impacted the lifespan of incandescent bulbs.
- Why consumers are holding on to their items longer and how that impacts the economy.
- How a global savings glut pushes down interest rates and what is causing it.
- How Treasury Inflation Protections Securities work and help us monitor real rates and inflation expectations.
Owning Things Longer Hurts The Economy
In a 1920s house we are restoring, we just installed two ceiling lights in the living room. They are L.E.D. flush mount lights. There are no light bulbs to replace. When the lights no longer work, the entire fixture will need to be replaced.
Given the average light in the American home is on for 1.6 hours per day, and the estimated life of these lights is 25,000 hours, our new living room lights should last approximately 42 years.
By then, we will most likely have moved or be dead.
The systematic replacement of incandescent light bulbs with longer lasting L.E.D. bulbs and lights is having a profound impact on the lighting industry.
Market analysts, such as the I.H.S. Technology and Strategies Unlimited, predict that in 2019 the global lighting industry will reach “socket saturation” in which enough incandescent bulbs will have been replaced by L.E.D. bulbs that overall light bulb sales will begin to decline.
In the 1920s, light bulb manufactures also worried about socket saturation as light bulb technological advances led to longer-lasting bulbs with many incandescent bulbs lasting 1,500 to 2,000 hours compared to 1,200 hours today.
How is it today’s incandescent bulbs are inferior in terms of lifespan compared to ninety years ago? Planned obsolescence.
The Light Bulb Cartel
In December 1924, representatives from the leading light bulb makers including the United States’ General Electric, Netherland’s Phillips, Germany’s Osram and others met in Geneva to organize the Phoebus cartel.
Not only did members divide the world into exclusive regions with production quotas, but they also agreed to reduce the average life span for standard incandescent bulbs to 1,000 hours.
Researcher Markus Krajewski reports that German bulb manufacturer Osram saws light bulb sales plummet 55% from 63 million bulbs in the financial year 1922-23 to 28 million bulbs the following year.
Thanks to the cartel and planned obsolescence, Phoebus members annual light bulb sales stabilized and then grew from 335.7 million in fiscal year 1927-28 to 420.8 million four years later. Meanwhile, average light bulb life dropped by a third from 1,800 hours to 1,205 hours between 1926 and 1933. In addition, profit margins increased as light bulb prices held steady as manufacturing costs fell and average light bulb life declined.
Today’s light bulb manufacturers can no longer depend on a cartel to protect their profits. Increased competition and pending socket saturation have hurt profitability, although L.E.D. bulb manufacturers have recently stabilized margins due to productivity improvements and cost innovations like lower phosphorous usage.
Meanwhile, L.E.D. bulb prices are plummeting. According to LEDinside, the average price for a 60-watt equivalent L.E.D. light bulb was $12.7 in September 2016. Three years ago that same bulb cost over $20 and five years ago over $40.
Owning Things Longer
While L.E.D. light bulbs are an extreme example of extending the life of products, subverting planned obsolescence, this trend is also seen in other areas.
For example, automobiles are lasting longer and consumers are keeping them longer. The average age of a passenger car on U.S. roads was 8.4 years in 1995, 10.0 years in 2004 and 11.4 years in 2014 according to the Bureau of Transportation Statistics.
Consumers are also holding on to their computers, tablets and smart phones longer. The average age of desktop computers worldwide was 4.5 years in 2006. In 2015, it was 5.6 years according to Statista.
Consumer Intelligence Research Partners found the number of iPhones that were more than two years old jumped to 49% of all iPhones in March 2016 from 34% in June 2013.
One reason consumers hold onto products longer is newer models aren’t significantly better than existing models in terms of core functionality to justify the cost of switching.
The Economic Impact
Falling prices for many consumer goods coupled with longer holding periods translate into slower economic growth as corporations slacken their rate of production of new goods and the aggregate dollar value of the goods produced is weighed down by lower prices.
This leads to lower corporate profitability, which in turn can lead to lower returns for stocks.
Today’s below trend economic growth can accelerate from its lackluster pace if households replace existing products faster, purchase new categories of products that didn’t previously exist or pay more to buy and maintain higher quality products that last longer.
Buying higher quality products that last longer but cost less would actually dampen economic growth unless households taking the savings and spend it elsewhere.
Cree, a U.S. based maker of L.E.D. lights, is trying to get consumers to replace L.E.D. lights by framing them as gadgets that need to be upgraded when new features come on board, the primary feature being better light.
“Better light makes the colors in the object that is illuminated more accurate, more vivid and more true,” according Al Safarikas, vice president of consumer product marketing for Cree, as quoted in recent New Yorker article by J.B. MacKinnon.
Cree also offers app driven lights that can be scheduled to remotely dim, brighten and turn on and off.
In my case, their plan is working. As part of the remodel, we installed a new L.E.D. light in study. This light has L.E.D. bulbs and the bulbs our electrician put in the light matches J.B. MacKinnon’s description of cheap L.E.D. bulbs that “cast the kind of light that gives a zombie pallor to human skin.”
We’ll be helping the economy by replacing the cheap bulbs with Cree bulbs to see if we indeed get “better light.”