Economic Indicators in the Automotive Industry

The Federal Reserve’s primary goal is sustained growth of the economy with full employment and stable prices. Real GDP is the most comprehensive measure of the performance of the U.S. economy. By monitoring trends in the overall growth rate as well as the unemployment rate and the rate of inflation, policy makers are able to assess whether the current stance of monetary policy is consistent with that primary goal. The automobile industry is one of the largest industries in the United States.

It creates 6.6 million direct and spin-off jobs and produces $243 billion in payroll compensation, according to a 2001 report on the “Contribution of the Automotive Industry to the U.S. Economy” prepared by the University of Michigan and the Center for Automotive Research (CAR). No other single industry is more linked to U.S. manufacturing or generates more retail business and employment. America’s automakers are among the largest purchasers of aluminum, copper, iron, lead, plastics, rubber, textiles, vinyl, steel and computer chips.

As defined on the William King website (n.d.), the unemployment rate is a “ratio, obtained by dividing the number of unemployed persons by the number of persons in the labor force.” The labor force is those individuals who have a job or those who are actively seeking work. Currently, according to the U.S. Bureau of Labor Statistics, (2005), the national unemployment rate in July 2005 was 5%. Regionally, the unemployment rate varies, as evidenced by Table 2.

Area Unemployment

Rate

Northeast: 4.9

Midwest: 5.5

South:4.9

West: 5.2

Table 2

The unemployment rate has an affect on the car industry, especially in purchases made. If there is a high unemployment rate in one area of the country, it would mean that in that area auto sales would be lower than in another region that has a lower unemployment rate. With less disposable income, stemming from unemployment, there is less demand for buying a vehicle–whether new or used. This, in turn, would mean auto sales would decline in that area of the country.

Personal income

According to Andrew Ackerman of The bond buyer (2005) “Personnel income rose .5% in June, while personal consumption grew 0.8%. Personal income rose 52.9 billion to about 10.28 trillion after an unrevised 0.2% increase in May.” In addition, The Bond Buyer also comments on spending stating that “spending increased in June to 8.72 trillion, following a revised 0.1% decrease in May, originally reported as flat. The purchase of an automobile can be justified as a required job expense or as a means for transportation where public transportation is not available.

A buyer may elect to purchase a basic automobile or may upgrade based upon their level of disposable income. According to investorwords.com (2005) disposable income is “the amount of income left to an individual after taxes have been paid, available for spending and saving.” Andrew Ackerman of The Bond Buyer (2005) states that “disposable personal income rose 0.5% or 44.9 billion to about 9.06 trillion in June. The aforementioned statistics would lead the reader to believe that buyers, in certain geographic areas of the country, would be more inclined to use their disposable income towards a more expensive automobile.

2005

Feb. Mar. Apr. May June

(Percent change from preceding month)

Personal income, current dollars 0.5 0.4 0.7 0.2 0.5

Disposable personal income:

Current dollars 0.4 0.4 0.5 0.2 0.5

Chained (2000) dollars 0.2 0.0 0.1 0.1 0.5

Personal consumption expenditures:

Current dollars 0.7 0.5 0.8 0.0 0.8

Chained (2000) dollars 0.4 0.1 0.4 -0.1 0.8

Reference: Bureau of Economic Analysis (http://www.bea.doc.gov/bea/newsrel/pinewsrelease.htm)

Erin Schurenberg of Money Magazine states that America’s Best Places to Live (August 2005) are “areas with above average median income, a highly educated and growing population, low crime, good schools, healthy real estate, appreciation and a thriving job market, are measures of an affordable quality of life.” With that being said that are select areas where automobile sales would in theory be higher than those areas, which do not compare to those quality of life areas listed.

Interest rates.

According to Kathleen Madigan of Business Week Magazine (August 2005) “Consumer spending got off to a roaring start in the third quarter, with car buying surging to a 20.9 million annual rate in July, the second highest on record.” Low rates will bolster demand; therefore it’s easy to see why second-half prospects are positive. For example, look at the ease with which the economy is weathering the energy shock. Madigan (2205) comments that “According to Greenspan, Fed staffers have estimated the increase in oil prices since the end of 2003 to have shaved about 0.5 percentage point from economic growth in 2004, and they appear on a track to restrain growth in 2005 by about 0.75 point.”

Despite the stress from record gas prices, consumers pounced on Detroit’s June round of sales incentives, helping to push overall retail sales for the month up by a booming 1.7%. Madigan states that “For the quarter, sales grew at an annual rate of 10.7%, the best quarterly showing in a year and a half. In fact, consumer spending, as it will be tallied in the GDP numbers due out on July 29, may well have grown faster in the second quarter than its healthy 3.6% rate in the first quarter.” As long as the real cost of borrowing remains as cheap as it is, low interest rates will continue to stimulate the economy, and automobile sales will continue to climb until rate increases effect consumer spending.

Domestic vs. Foreign Sales.

Foreign auto sales continued to increase in the month of August as US manufactured car inventories were depleted due to the large discounts (employee pricing) given. The increase in foreign brand automobiles did not affect the U.S. trade deficit as you would think on first thought. The dollar amount of automobiles, pats and engines imported actually decreased by .2 billion as the sales of foreign cars increased. This is due to several factors. Foreign automakers continue to open new plants in the U.S. therefore reducing the amount of new cars imported. Foreign automakers are also changing to American suppliers for some of the component parts used in their new cars to save on shipping and inventory costs. American auto manufacturers are following suit and increasing their presence in foreign countries. Many U.S. companies now have a manufacturing plant in China and other low cost countries utilizing the cheap labor and materials while saving on shipping and export costs.

Inflation.

Price inflation is defined as a fall in the market value or purchasing power of money (free-definition website, 2005). Inflation in price of any consumer goods, even automobiles, usually means a decrease in the purchase of such items. The following averages for the inflation rate were recorded in 10-year periods from 1910 to 2003. Inflation for the “teens” decade was the highest at 14.57%; while the following decade actually averaged zero inflation; two decades showed negative inflation (or deflation); the most prosperous decades were those of low inflation, like the roaring twenties, the fabulous fifties, and the nineties.

Conclusion.

It is easy to see that many factors contribute to the bottom line to the automotive industry; from the impact of GDP, the unemployment rate, personal income, interest rates, domestic vs. foreign sales, and inflation. If there is a shift in any one of these factors, automobile sales can be affected; if there is a change in a combination of factors it could be disastrous or helpful. The economy is a fickle beast, and one that must be constantly watched in order to survive in the business world.

References

Foreign Trade Statistics, (2005). Goods and Services Deficit Increases in June 2005 Retrieved on August 20,2005 from http://www.census.gov./indicator/www/ustrade.html

Free-definition website (2005). Retrieved on August 20, 2005 from

http://www.free-definition.com/Inflation.html

Inflationdata website (2004). Retrieved on August 20, 2005 from http://inflationdata.com/Inflation/Inflation_Rate/DecadeInflation.asp

Light-Weight Vehicle Sales Chart (July, 2005). Retrieved August 17, 2005, from http://www.newyorkfed.org/research/directors_charts/pi_6.pdf

McAlinden, Ph.D. S.P., Hill, K., Swiecki, B. (Fall 2003). Economic Contribution of the Automotive Industry to the U.S. Economy – An Update. A Study Prepared for the Alliance of Automobile Manufacturers. Retrieved August 17, 2005, from http://www.autoeverywhere.com/fullstudy.pdf

Madigan, Kathleen (8/1/2005) Summer Grows to Warm for Fed Business Week Magazine Retrieved August 20, 2005 from UOP EBSCO Host

McCain, Roger A., (n.d). Concepts of Unemployment. Retrieved on August 18, 2005, from http://william-king.www.drexel.edu/top/prin/txt/probs/Ch5_unNconc.html

Schurenberg, Eric (August 2005) America’s Best Places to Live Money Magazine Vol 35 Issue 8, p20-20, 1p, 1c Retrieved August 20, 2005 from http://www.moneymagazine.com

U.S. Department of Commerce (2005) Bureau of Economic Analysis Retrieved 20 August 2005 from http://www.bea.doc.gov

U.S. Department of Labor, Bureau of Labor Stastics, (2005). Current Employment Statistics. Retrieved on August 19, 2005 from http://www.bls.gov/ces