What Economic Indicators are Important for Investing in the Automotive Industry?

Economic Final Project
Rajonne Mitchell
ECO 372
April 12, 2013
Judith Vandenberg

Economic Final Project
During the current economic conditions companies are facing many challenges. A way of making changes can save or preserve what the company has built over the years. The purpose of this paper will be to review what economic indicators that the automotive industry uses and includes an in-depth analysis on how team C’s forecast will affect the industry. Then go on to give an evaluation of the effect of past and current fiscal policies, monetary policies, budget deficits, or surpluses on the economy and the auto industry. Followed by a few final recommendations and strategic initiatives of what team C would take to help the auto industry become stronger and weather through the current economic conditions.
The auto industry is a large market located in most countries around the globe. There are six economic indicators that affect the auto industry and other neighboring industries. The auto industry is reflected by the increase and decrease of economic activity. Therefore, the auto industry is affected by trade and real GDP. Real GDP is the total output of goods and services that adjusted periodically by inflation. The auto industry was responsible of 4.1 % of the real GDP in the 1980s and 3.5 % in 2004 (Kubarych, 2004). The significant percentage shows how the auto industry is a source to the real GDP for the United States.
Another economic indicator is unemployment rate. Unemployment rate is the rate of dislocated workers who can work. The auto industry is responsible for employing more than three million workers in the United States alone (U.S. Bureau of Labor Statistics, 2010). With the responsibility of employment over many workers in the United States, the auto industry will be one of the contributing factors on the unemployment rate. When gas prices increase and decrease in economic activity the auto industry is affected in a way that creates a decrease in demand. When demand decreases, the auto industry has to lower supply. When supply is lowered the auto industry has to lay off workers to balance financial health of the industry, which creates an increase in unemployment rates.
The inflation rate is the price changes on goods and products. These price changes reflect the value of the product or service. The auto industry itself is affected in a large way by inflation. Inflation creates a larger cost on manufacturing the product. To make up cost of manufacturing the product the auto industry has to increase prices of products to make up cost. The consumer is affected in a way that demand can decrease. Other than the basic economic indicators there are three other indicators as well that affects the auto industry. The three indicators are auto sales, Producer Price Index (PPI), and oil and fuel prices. Auto sales indicate the revenue acquired after production of an automobile. With the amounts of auto sales recorded, the auto industry will be able to use information accurately to forecast future supply and demand. Producer Price Index is the measurement of change of prices over a period of time by the auto industry. The changes in prices reflect on the performance levels of the auto industry. Low PPI shows the auto industry is stable and has ability to perform. High PPI shows the auto industry has effects from economic activity whether negative or positive effects. PPI change could be suggested as a way to measure the economic activity in the nation.
Oil and fuel prices are economic indicators for the auto industry as well. The high cost of fuel can lower demand because inability to operate automobile with increased fuel prices. Thus the auto industry has to reflect manufacturing a vehicle to meet the demand of fuel savings. Many larger vehicles such as trucks, vans, and sport utility vehicles can decrease in demand, whereas hybrid and high mpg vehicles seem to flourish. Oil and fuel prices will be an indicator for the auto industry in relation to manufacturing demand product. The economic indicators are used as tools to forecast for the auto industry as well.
An analysis of the auto industry forecasting methods is acquired. Economic indicators are a way to judge the economic activity of the country. By using the economic indicators the auto industry can use forecasting techniques to prepare accurately for a future period in time. Consumers hold off purchases of automobiles when the economy is bad, but pick up purchasing as condition of economy get better. The auto sales indicator is a tool used to contribute to forecasting techniques. The auto sales indicator shows how much revenue was acquired from sales of the automobiles. J. D. Power and Associates is a source that contributes to forecasting auto sales for future periods. The source is most accurate compared to other sources because of the ratio between forecast and indicated amounts of revenue. The forecast is used by the auto industry as a guide to development of new vehicles along with contributing to the budgeted expenses for upcoming year. The forecast also provides the auto industry the ability to implement planning in the upcoming year. The auto sales can be affected anytime by the nation 's economy; thus the forecast may not be the exact prediction. Therefore, the auto industry can use numerous years of forecast data to see trends to establish an alternate plan. By using the forecasting method the auto industry will keep a tight budget to reflect sales to keep profit margin at a protected rate. The Producer Price Index uses forecasting tools to recognized trends over a period. These trends can be established from year to year and month to month. This allows the auto industry to view trends to establish marketing strategies, budgeting analysis, and production. By viewing the PPI the industry can forecast for upcoming years as well as allowing each manufacturer to implement a plan based on forecast to develop a competitive advantage.
Oil and fuel prices are one of the common sources for forecasting. To operate many automobiles on the market, oil or fuel is needed. By using the economic indicator the auto industry obtains vital information on what type of vehicles to manufacture. The information obtained by using forecasting tools will allow the auto industry to decrease supply of goods acquiring less miles per gallon (mpg) and increase supply of high mph vehicles when oil and fuel prices are high. The opposite is applied when oil and fuel prices are low. There are a variety of forecasting models that exist to predict future events or trend with the economy. Industries such as the auto industry use the forecasting sources and economic indicators to keep the industry alive and aide in creating a financially healthy industry.
The government provides each industry with a set of economic indicators relevant to the conditions of the industry. By providing economic indicators the industry can forecast for future periods of time based on growth of the industry. The six economic indicators are not the only proposed way to forecast for the auto industry. One method relevant to the auto industry is the observance of consumer spending. By viewing consumer viewing a trend can be established to acquire forecast information pertaining to future periods spending. By using the data obtained in consumer spending the auto industry can see how consumers handle increase and decrease prices in the economy. This allows the industry to forecast or obtain a plan for implementing budgeting based on previous trends. This approach is straightforward in predicting the economy in future periods and is often accurate in analyzing trends. The approach can uncover changes in the spending habits based on demographics of the consumers that may lead cost shift in supply and demand (HS Dent, 2010). Even with the forecasting method in place the industry can imply changes at any given time for unexpected economic activity.
“The auto industry plays a significant role in the U.S. economy. In October 2010, employment at auto and parts manufacturing and dealerships was more than 3.3 million, according to the federal Bureau of Labor Statistics” (Basu, 2011). Past and present fiscal policies, monetary policies, budget deficits or surpluses affect the economy and the auto industry as well. “Fiscal policy is the means by which a government adjusts its levels of spending in order to monitor and influence a nation’s economy” (Investopedia.com, 2009). Fiscal policies affect everything from taxes to unemployment rates. Even though this is true, fiscal policies many not affect everyone in the same way. If the government decides to raise taxes, they may not raise them for everyone. They may decide to only raise taxes on the upper class or the middle class. When the government decides to build a street or a bridge, this provides many jobs for people who work construction. This in turn helps to lower unemployment numbers.
Fiscal policies helped to save a couple of big players in the auto industry in 2008. With a big downturn in the economy, the rise in gas prices, and more and more people losing their jobs, Americans were not buying automobiles at the same rate as they had done in previous years. General Motors and Chrysler were both facing bankruptcy. The government stepped in realizing that these auto manufacturers were too big and had to big an impact on the economy to fail, they offered the companies bailouts. Between the two companies, they received a total of $17.4 billion from the government to avoid bankruptcy and attempt to boost auto sales (Amadeo, 2011).
“Monetary policies are the actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the vault (bank reserves)” (Investopedia.com, 2011). This means that monetary policies have a direct effect on the economy because changes in interest rates can sway people’s decisions on whether or not to finance large sums of money for items such as homes or cars. Monetary policies also affect the countries inflation. If too much new money is introduced into the economy to fast inflation rates will increase. This directly affects how much people can buy. With a rise in inflation the value of the dollar decreases and in turn cannot buy the same amount of a product as they previously did before the rise in inflation. This means that a person will have to spend more money to get the same things they previously purchased, but for less money.
“The health of the auto industry depends on the health of the economy. Monetary policy sets the tone for the economy. If interest rates are low, cars are more affordable, which usually means more auto jobs. If interest rates are high, dealerships have more unsold cars and auto jobs are fewer. This leads to fewer taxes paid by the industry and more unemployment insurance payouts, both of which affect fiscal policy” (Basu, 2011). The auto industry is stronger when interest rates are low and people have money to spend. When the auto industry is strong the economy is stronger because more people are employed and able to spend money to help boost the economy.
Budget deficits and surpluses affect both the economy and the auto industry in similar manners. If the country has a budget deficit in most cases the government will have to cut government spending or even raise taxes to attempt to balance the budget. This has a negative impact on the economy because if government spending is cut jobs are lost. If the government cannot afford to continue work on a bridge or road they will have to stop the job and many construction workers will lose their jobs. This will cause unemployment to rise. With a rise in unemployment or a rise in taxes people have less money to spend and put back into the economy so the economy slows. This is the same thing that happens to the auto industry if there is a budget deficit. If people do not have money to spend they will not purchase that new vehicle or pay for the part that they need to fix their vehicle. This will reduce the number of automobiles and parts that need to be produced and can cause a layoff to be done within the industry resulting in a rise in unemployment rates. The auto industry is directly affected by the economy.
On the other hand, if the economy is strong, and there is a budget surplus this has a positive effect on the economy and on the auto industry. With a budget surplus, the government could increase government spending. This would lead to more jobs and with more jobs there are more people who can afford to spend money. The government could also cut taxes. This would allow people to have more money from their pay checks and with more money there is more spending. This directly affects the auto industry because when people have money to spend they will be more likely to make the big purchases, such as a vehicle. People will also be more likely to get the repairs done on their vehicles that they have been putting off until they could afford to do them.
The automotive industry has suffered major damage because of the last recession within the United States economy. Alarmingly high unemployment rates and the new threat of inflation have slowed the recovery of the automotive industry from a near collapse and with it the recovery of the economy, which is closely related to the success of the automotive industry. The complications in the global market have further complicated the recovery process of the automotive industry by dragging down retail sales and production levels due to growing concerns of debt and unemployment in several nations. The financial troubles plaguing the global market and the remaining uncertainty of the success of the government-funded bailouts for the United States automotive industry have caused automotive companies to rethink their strategies, and evaluate their company 's current position in the global automotive industry. Automotive company managers must consider the future needs of consumers, the environmental impact of their products, and the quality demands placed on the industry by society when formulating long-term competitive strategies (Muller, 2010).
General Motors is one of several automotive companies in the United States that was forced to accept government assistance during the recent recession to avoid a disruption in its daily operations. The company was forced to abandon several of its brands or certain models and restructure its operations to achieve a more cost efficient business model. The company has managed to remain productive and has regained some of its lost competitiveness and profits through aggressively seeking to expand its operations into new markets where demand for quality transportation methods has risen during the last several years. However, despite the company 's best efforts to achieve the same level of prosperity it once enjoyed, the slowdown in the world economy has hampered the company 's growth and forced the company to consider new strategies to remain a competitive force in the automotive industry (Flint, 2009).
One recommendation for General Motors that will allow the company the opportunity to grow is to continue its aggressive expansion into new markets. This will help the company regain its competitiveness in the industry by introducing its products to new consumers who may be looking for new and exciting automobiles to express their individuality or businesses who may be searching for a more dependable transportation solution. The company will not only have the opportunity to increase retail and business automobile sales but will also be able to increase the amount of vehicles it provides for fleet services, such as car rental services, taxi services, and government agencies that rely on vehicles to provide services to society (Schaefer, 2011). Expanding into new markets opens up the possibility that the company will be able to form new partnerships that will help lower the cost of production while maintaining a high degree of quality in its products. The lower production costs will allow the company to commit more resources to research and development projects that will help ensure the company is able to meet the future needs of consumers (Savitz, 2011).
Brand protection is one area of General Motors long-term strategy that it can improve upon. In the past, the company has allowed several of the brands it promotes to degrade by focusing only on the promotion of its highest performing brands. This forced the company to drop its neglected brands completely due to financial constraints, which resulted in a decrease in the company 's consumer base. The closure of these brands may have made the company appear to be unstable to consumers. By consumers losing faith in the company may further contribute to consumer turning to competitors who appear more stable due to worries over General Motors ' ability to fulfill warranty and repair obligations during its financial struggles. The company can prevent this scenario from occurring by marketing its brands equally to their desired consumers and making sure that each brand is able to stand out from the products and services marketed by competitors (Sunshine, 2011).
General Motors has the flexibility to adapt several strategies to help the company achieve its goals. One strategy involves dedicating more of the company 's resources to researching and developing new technology that will improve the fuel efficiency and safety of the company 's products. By developing partnerships and working with research firms and the scientific community to develop stronger metals and new engine parameters, the company will be better equipped to investigate and develop safer automobiles, and more efficiently produce effective research results (Savitz, 2011).
Developing partnerships with companies outside the United States may also prove to be an effective strategy for reducing production costs. Searching for companies that can produce and assemble low costs automobile parts without sacrificing quality will be necessary for the company to implement this strategy. This may help the company counter the effects of the rising costs of raw materials. The company may also consider relocating production operations to countries were production costs are significantly lower than in the United States, which may help alleviate the strain of increasing production costs that may force the company to raise the prices on its automobiles (Muller, 2011). The downside to this scenario would be that this type of action would increase unemployment, due to the lack of jobs created by the automotive industry.
The company can focus more on developing environmentally friendly cars and the development of alternative sources of fuel. Electric automobiles rely on battery and solar power instead of fossil fuels. These types of cars can help reduce the amount of greenhouse gases released into the atmosphere from the operation of automobiles. By developing cars that rely on battery power, the company will be able to promote a green initiative and show its dedication to protecting the environment, while attracting new consumers who are interested in smaller, more environmentally friendly cars (Savitz, 2011). The technology used in these types of vehicles may have other uses as well, which increase the usefulness of the products to consumers. For example, the battery packs that power electric cars are being researched as an alternative power source for homes in case of a power outage (Wang, 2011).
Implementing these strategies and adapting to future changes in consumer needs and demands placed on the automotive industry will be key factors in the successful revitalization of the General Motors brand of automobiles. General Motors must remain flexible in the strategies it adopts to take advantage of new opportunities and technology as they arise or the company may face the risk of delayed growth and be viewed as a damaged company. To avoid this, the company can change its marketing strategy to present the company and products in a fresh and exciting method to consumers. This can show the company is focused on developing innovative products that will improve the quality of life of its consumers.
During the current economic conditions companies are faced with many challenges. A way saving or preserving what the company has built over the years is essential to the survival of the company. This paper has reviewed what economic indicators that the automotive industry uses and included an in-depth analysis on how team C’s forecast would affect the industry. Reviewed the effect of past and current fiscal policies, monetary policies, budget deficits, or surpluses on the economy and how it affects the auto industry. Followed by a few final recommendations and strategic initiatives that should be taken to help the auto industry become stronger and weather through the current economic conditions.

References
Amadeo, Kimberly, 2011. The Auto Bailout. Retrieved December 2, 2011 from http://useconomy.about.com/od/criticalssues/a/auto_bailout.htm website.
Basu, Chirantan, 2011. Monetary & Fiscal Policies in Automotive Industry Employment. Retrieved December 2, 2011 from http://www.ehow.com/facts_7505790_monetary policies-automotive-industry-employment.html website.
HS Dent. (2010). The HS Dent method. Retrieved from http://www.hsdent.com/
Investopedia.com, 2011. Monetary Policy. Retrieved December 2, 2011 from http://www.investopedia.com/terms/m/monetarypolicy.asp#axzz1fOSeIwWI website.
Investopedia.com, 2009. What Is Fiscal Policy. Retrieved December 2, 2011 from http://www.investopedia.com/articles/04/051904.asp#axzz1fOSeIwWI website.
Kubarych, Roger, 2004. Impact of a Volatile Auto Sector on the US Economy. Retrieved on November 13, 2011 from http://www.cfr.org/economics/impact-volatile-auto-sector-us economy/p7192 website.
Muller, J. (2010). After saving the auto industry, Washington 's new rules could choke it. Forbes. Retrieved from http://www.forbes.com/sites/joannmuller/2010/12/15/after-saving-the-auto-industry-washingtons-new-rules-could-choke-it/
Savitz, E. (2011) Megabets and megarisks: Remaking the auto industry. Forbes. Retrieved from http://www.forbes.com/sites/ciocentral/2011/11/29/megabets-and-megarisks-remaking-the-auto-industry/
Schaefer, S. (2011). Investors pump brakes on GM, Ford after October sales. Forbes. Retrieved from http://www.forbes.com/sites/steveschaefer/2011/11/01/gms-october-sales-creep-higher-shares-slammed-in-market-rout/
Sunshine, M. (2011). GM"s failure of brand management at GMC and Buick. Forbes. Retrieved from http://www.forbes.com/sites/greatspeculations/2011/11/29/gms-failure-of-brand-management-at-gmc-and-buick/

References: Amadeo, Kimberly, 2011. The Auto Bailout. Retrieved December 2, 2011 from http://useconomy.about.com/od/criticalssues/a/auto_bailout.htm website Basu, Chirantan, 2011. Monetary & Fiscal Policies in Automotive Industry Employment. Retrieved December 2, 2011 from http://www.ehow.com/facts_7505790_monetary Investopedia.com, 2011. Monetary Policy. Retrieved December 2, 2011 from http://www.investopedia.com/terms/m/monetarypolicy.asp#axzz1fOSeIwWI website. Investopedia.com, 2009 Kubarych, Roger, 2004. Impact of a Volatile Auto Sector on the US Economy. Retrieved on November 13, 2011 from http://www.cfr.org/economics/impact-volatile-auto-sector-us economy/p7192 website. Muller, J. (2010). After saving the auto industry, Washington 's new rules could choke it. Forbes. Retrieved from http://www.forbes.com/sites/joannmuller/2010/12/15/after-saving-the-auto-industry-washingtons-new-rules-could-choke-it/ Savitz, E Schaefer, S. (2011). Investors pump brakes on GM, Ford after October sales. Forbes. Retrieved from http://www.forbes.com/sites/steveschaefer/2011/11/01/gms-october-sales-creep-higher-shares-slammed-in-market-rout/ Sunshine, M