Macroeconomic indicators and their impact on the U.S. automobile industry

Macroeconomic Changes in the Economy -- the U.S. Automobile Industry

Industry Overview

The American automobile industry was once the undisputed leader in the international market, with producers such as General Motors, Ford and Daimler-Chrysler patronizing the global top in sales and reputation. Throughout the past recent years however, it was met with major challenges from the Japanese automobile industry, which was better able to incorporate the macroeconomic changes in their products. The national auto industry is now focusing on incorporating features such as fuel efficient engines and developing environmentally friendly vehicles. Aside competition and increasing customer demands, the U.S. auto industry has also been dramatically impacted by the globalized financial crisis. General Motors and Daimler-Chrysler have already received money from the government under TARP (Troubled Assets Relief Program), but Ford argues that they possess sufficient liquidities and do not need the federal aid.

A more in depth look at the industry will reveal that customer demands for vehicles are in direct relationship with employment and interest rates. The ultimate success of a manufacturer depends on its abilities to operate efficiently, to develop and implement adequate marketing strategies and to ensure high levels of product and service quality. The large size entities produce various products and sell them under different brand and the small size manufacturers often produce a single product line. Finally, the large size companies enjoy the benefits of scale economies, mostly materialized in increased access to resources, reduced costs and a wide customer palette. The small size producers are focused on specific and specialized markets. The industry has been subjected to intense processes of automatization, meaning that the demand for unskilled labor force decreased and the demand for skilled workers increased. This led to a situation in which the mean revenue per employee in the industry is of $1.4 million per annum. The estimated growth rate of the industry for 2009 is of a negative 13%, with hopes of a positive 4% increase in 2010 (Hoovers, 2009).

2. Economic Indicators and their impact on the Automobile Industry

The economic indicators are calculated figures that allow economists to assess the performances of a given economy or sector and make future predictions. The list of economic indicators is rather extensive, with some of the most important indexes including the gross domestic product, the unemployment rate, the inflation rate, the personal income, interest rate and producer price index.

2.1 Gross Domestic Product

The gross domestic product is an index measuring the "monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis" (Investopedia, 2009). U.S.'s GDP for 2008 has been of $14.29 trillion, revealing a 1.3% increase relative to 2007. The chart below reveals the evolution of the gross domestic product through 2000 up to the first quarter of 2009.

The future GDP is expected to gradually increase according to the chart below:

* The estimative charts for all six categories of economic indicators are based on assessments from the Center of Financial Forecasts.

Whenever a negative change occurs in the country's gross domestic product, this may reflect revenue shortages within the automobile industry due to reasons as various as modifying consumer preferences, reduced purchasing power or fewer technological investments. Increases in the GDP could mean that the automobile sector increased both production as well as sales.

2.3 Inflation rate

The inflation rate measures the increase in inflation, or the amount by which a given index has increased, such as the consumers' price index. Throughout the past year, the inflation rate in the United States has fluctuated, with the recent months revealing significant decreases, to even reach negative values:

Source: Trading Economics, 2009

Negative values will continue to be encountered during the following 18 months, but the end of 2009 will also reveal positive values due to increases in inflation rates:

Similar to the unemployment rate, whenever the inflation rate increases, sales in the automobile industry decrease as a direct result of reduced purchasing power. Vice versa, decreases in inflation rate generate increased purchasing power and lead to growths in the sales revenues of the automobile industry. Inflation is evermore so important for the American auto sector as it affects not only the national buyers, but also the international ones.

2.4 Personal income

The personal income can be defined as the totality of money an individual makes in a given period of time, generally one year. The money can come from wages, investment interests, passive enterprises and dividends (Investor Words, 2009). The general trend across decades is a definite ascendant one:

Source: Crystal Bull, 2009

The ascendant trend is expected to be maintained throughout the following 18 months, with the specification that the growth rate might be reduced as a direct result of the contemporaneous financial crisis:

An increased personal income will mean that the potential customers of the automobile industry possess more financial resources and are better able to purchase the manufacturers' vehicles. However, a greater personal income also has a negative take on producers as it implies increased expenditure with the wages of the personnel. On the other hand, a reduced personal income means that the manufacturers will register lower expenditures with the payment of employees' wages, but the number of their customers and their purchasing power will also decrease.

2.5 Interest rate

The interest rate can simply be defined as the money paid by a borrower to its lender in exchange for using the money. Better put, when an individual borrows money, he will reimburse the entire sum borrowed, plus a difference called an interest rate. The interest rates reached their peak during the 1980s and then continually decreased.

Source: Mortgage-X, 2009

The prime loan interest rate for today is of 3.250 and it is expected to maintain the same value for the next period. The measure has been decided to offer stability to the American banking and financial sector.

Unlike the previous indicators, the interest rate reveal an indirect relationship with the automobile industry in the meaning than an increase in interest rates generates a decrease for the automobile industry. Otherwise put, when the central bank decides to increase interest rates on loans, they make it more difficult for the population to afford credits -- no financial opportunities means no car purchases and consequently reduced organizational revenues. Additionally, high interest rates also mean that the vehicle producer is less able to contract loans to further develop his business. Vice versa, a relaxation of credit operations through a reduction of the interest rates generates an increased purchasing power and an increased ability for the manufacturer to contract loans and further invest in his business.

2.6 Producer price index

The Producer Price Index, or the PPI, stands for "family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time. PPIs measure price change from the perspective of the seller" (Investopedia, 2009). The evolution of the PPI has also been a fluctuating one, with a major ascendant trend:

Source: United States Department of Labor, 2009

Despite the past increase in producer price index, the future seems to hold decreases in its value:

The downward trend forecasted for the following 18 months means that the automobile producers in the United States receive less money for the sale of their products. Increases in this value lead to growths in the revenues of the vehicle producers, but a most compelling conclusion can only be drawn through correlation with the inflation rate throughout the studied period. For instance, if the inflation and the PPI grow at similar rates, the automobile manufacturers have not gained any real advantage.

References:

Ford Motor Company, Hoovers, 2009, http://hoovers.com/ford-motor/--ID__10597,FRIC__ -- /free-co-competition.xhtml last accessed on May 8, 2009

Gross Domestic Product, U.S. Bureau of Economic Analysis, 2009, http://www.bea.gov/briefrm/gdp.htm last accessed on May 8, 2009

Interest Rate Trends, Mortgage-X, 2009, http://mortgage-x.com/trends.htm last accessed on May 8, 2009

Producer Price Indexes, United States Department of Labor, http://data.bls.gov/PDQ/servlet/SurveyOutputServlet-request_action=wh&graph_name=WP_ppibrief last accessed on May 8, 2009

The U.S. Unemployment Rate January 1948 to March 2009, Misery Index, 2008, http://www.miseryindex.us/urbymonth.asp last accessed on May 8, 2009

United States Inflation Rate, Trading Economics, 2009, http://www.tradingeconomics.com/Economics/Inflation-CPI.aspx?symbol=USD last accessed on May 8, 2009

Crystal Bull, 2009, http://www.crystalbull.com/stock_market_timing/Personal_Income_chart last accessed on May 8, 2009

Investopedia, 2009, http://www.investopedia.com last accessed on May 8, 2009

Investor Words, 2009, http://www.investorwords.com last accessed on May 8, 2009

The Financial Forecast Center, 2009, http://forecasts.org last accessed on May 8, 2009