Automotive Industry Overview (Macroeconomics)

Jenna Doucet (2010).

The Automotive Industry Overview

Abstract

The paper analyzes and summarizes how the automotive industry is impacted by the macro economy. The paper includes brief history of the automotive industry, how it impacts the GDP, the unemployment rate, and the inflation rate as measured by the Consumer Price Index (CPI).

The supply and demand of the automotive industry as well as the profits derived from the sector are clearly impacting by then macroeconomic policies. The industry’s history demonstrates the trends it follows in the business cycle and how economic indicators have impacted the performance of the industry over the years. The measure of production, interest rates, real GDP, automotive sales and inflation and unemployment are some of the most compelling instruments that can be used to assess the state of the automotive industry.

Automotive Industry History
In the initial stages of the automotive industry, motoring was considered a sport rather than a means of transportation. It took many centuries from the creation of the first successful self-propelled road vehicle in 1770 for motorcars to generate enough demand for widespread production. After the formation of the Automobile Board of Trade, which eased the monopoly in the industry and promoted the sharing of patent rights there were many successful automakers. Later, as competition began to rise three corporations came to flourish and dominated the industry in the United States. The “big Three” that made headlines were Ford, GM and, Chrysler (Smith, 1996).

Auto Production Business Cycle
The U.S automotive industry saw a steady expansion from its inception until 1978 in which where production reached its all-time peak. The industry showed a small contraction and a quick recovery leading to its peak between 1972 and 1976. In the early 1980 there was a big drop in production units and the industry fell into its first true recession. The industry recovered in the mid 80s peaking in 1988, but never reached its previous high before falling into another recession that lasted from 1990 to 1992 (Smith, 1996). The automotive industry’s production rates have been cycling through different business phases throughout history. In 1999 the automotive industry finally recovered and reached its previous high. Now the automotive industry is again experiencing a recession. Traditionally, during times of expansion the inflation in the economy is stable, and firms invest more capital to meet increased demand. Expansions also contribute to a higher rate of employment. The final stages of expansion, at the peak “demand begins to outstrip the capacity of the economy to supply it. Labour and product shortages in the industry are evident in this stage. Contractions and recessions in a business are usually associated with a decrease in the economy’s real GDP. “ Firms faced with unwanted inventories and declining profits reduce production, postpone investment, curtail hiring and may lay off employees”. (Canadian securities textbook, 2008. Ch. 4 p.17). A through is characterized by the curtailing of falling demand and excess capacities. An overall contraction in the business cycle of real GDP lowers inflation and interest rates. “ The trough is reached when consumers who postponed purchases during the recession are spurred by lower interest rates to begin satisfying some of their pent-up demand” (Canadian securities textbook, 2008. Ch. 4 p.17). A recovery in a business cycle only occurs when GDP or business activity returns to its previous peak.

Interest rates
Interest rates are an important determinant of the performance of an industry. For consumers, interest rates represent the available funds they are willing to borrow to satisfy today’s needs. For businesses they represent the cost of borrowing money to invest in the growth of a company. The following graph represents interest rates changes over the years along side automotive production rates and real GDP. Production rates and real GDP decline as interest rates increase (Canadian securities textbook, 2008. Ch. 4 p. 29).

Real GDP
According to economists Ballew and Schnorbus (1994) the automotive industry is one of the best examples of how durable goods drive economic activity. In the US the automotive industry can influence economic change up to as much as 40% but contributes about 4% of the economy’s GDP (Helmut, 1994). The effects of how the cyclical change of the durable goods sector impacts the automotive industry can be exemplified by the industry’s trends in between the years of 1970 and 1991 respectively. The peaks and lows of the expansions following the troughs of 1970, 1975, and 1982 have been significantly above par the gains and losses of 1991. The industry’s cyclical recovery pattern during those years was very similar to the country’s recovery pattern in both GDP and CPI at that time (Ballew & Schnorbus, 1994). In 1970, the annual percentage change of real GDP was low, just as it was in 1975 and 1982. Over the years, peaks, and troughs in the automotive industry’s production rate follow closely with the time frames of the peaks and troughs in the economy’s real GDP.

Auto Sales: Unemployment and inflation
The peaks and valleys of the GDP also trend in the industry with auto sales. After the peak in 1978 the cycle of sales have risen and fallen. The amount of sales foreseen will not reach the same level it once did because of the advances in technology, creating more long lasting durable vehicles. In addition to technological advances the unemployment rate and inflation rates affect the number of vehicles sold. Auto sales in a positive direction generate the production levels, which in turn contribute to the employment rate (Dolbeck, 2002). One of the trends of employment in the business cycle is that it declines during a recession. This trend is evident and corresponds to the statistics in both the business cycle and employment rates in the U.S between 1970-2009. The weekly unemployment insurance claims both peeked in 1975 and 1982 during the respective recessions. In the current recession numbers for unemployment insurance have more than doubled (Shedlock, 2009). Unemployment and inflation have a direct relationship with one another. Inflation also imposes many cost on society. From 1970-1980, inflation rates in the U.S were high relative to unemployment rates, a characteristic that could be attributed to the growing economy. During these years of high volatility the automotive industry was also generally following trends of expansion. Newer data suggests that higher rates of unemployment are correlated with lower rates of inflation

Conclusion
Many factors effect the performance of an industry and as each industry makes up a portion of real GDP, they in turn can impact the cycle of the economy. The automotive industry is clearly impacted by macroeconomic policy and auto production and sales rates in relation to interest rates, real GDP, inflation and unemployment make this evident.

References

Ballew, P. & Schnorbus, R. (March, 1994). The impact of the auto industry on the economy. The Chicago fed letter. Retrieved on January 29, 2010 from: Bnet database.

Canadian Securities Course Volume 1 (2008). The Canadian Regulatory Environment. Toronto: The Canadian Securities Institute

Dolbeck, A. (2002). Auto industry accelerates as economy slows. Weekly Corporate
Growth. Retrieved January 31, 2010.

Helmut, H. (October, 1994). The automotive industry and monetary policy: an
international perspective. Business Economics. Retrieved February 1, 2010
from: http://www.allbusiness.com/finance/473760-1.html

International organization of motor vehicles- OICA (2009). U.S auto production
statistics. Retrieved January 16 2010 from: http://www.oica.net

Shedlock, M. (July, 2010). U.S unemployment claims: how bad are the “real” numbers?
Economics: recession 2008-2010. Retrieved February 1, 2010. Retrieved from:
http://www.marketoracle.co.uk/Article11934.html

Smith, D. (1996). Automobile industry. History encyclopaedia: World almanac education group. Retrieved January 19, 2010 from: www.history.com

U.S Department of commerce: bureau of economic analysis (2010). Real GDP statistics.
Retrieved January 16, 2010 from: http://www.bea.gov/