Auto Industry: Macroeconomic Considerations Before Business Expansion (Term Paper Sample)

Auto industry: Macroeconomic considerations before business expansion.
Student’s Name
Institution
Course
Introduction
The auto industry is an important industry, in the past it has contributed about 3 to 3.5 percent to the overall GDP (Gross Domestic Product). The auto industry employs people engaged in engineering, designing, manufacturing, parts and components manufacturing and sell and service of vehicles. The industry is also a huge consumer of services and goods from other sectors (Ballew & Schnorbus, 1994). According to a report by the federal Bureau of Labor Statistics in October 2010, the number of people employed in auto and parts manufacturing as well as dealerships was more than 3.3 million. The auto industry faced tough times during the period between 2008 and 2010, the period was characterized by extremely tight credit has made it impossible for companies and consumers to make investments. Many manufacturers, suppliers and dealerships were fighting for survival in the industry.
In the past two decades the auto industry has seen a transformation with the domestic assembly plants have slowly losing their market share in United States to international firms like Honda, Toyota and Hyundai. By the end of 2009 the market share of the three main domestic auto manufacturers was just below 4.2 perc(U.S Department of commerce: bureau of economic analysis 2010).
Macro economic analysis of the Auto industry
The health of the economy is crucial for the health of the auto industry. Monetary policy and fiscal policy set the tone for the economy. Low interest rates make car more affordable, meaning more people are able to purchase cars and subsequently increased demand. The effect is more auto jobs. If interest rates are high, the demand decreases and auto jobs are fewer. This decreases the taxes paid by the industry and increases unemployment insurance payouts, both of which affect fiscal policy (Helmut, 1994).
Throughout history the auto industry is characterized by its production rates cycling through different business phases. When the industry is experiencing expansion the economy at that time is usually stable the auto vehicles manufacturers and parts manufacturers are able to invest more capital to meet the increased demand. This time of expansion also contributes to increased employment in the industry. At peak of the expansion stage the demand becomes higher than the economy’s ability to supply, product and labor shortages are usually evident. On the other hand when the economy is experiencing a decrease in real GDP the auto industry undergoes a period of contraction and recession. Firms in the industry start facing decreased profits, unwanted inventories, postponed investment and the need to lay off employees. The cycle is repeated because when the interest rates are lower again and the GDP improves the consumers begin to satisfy their pent-up demand that they were holding during the recession. A recovery of the auto industry business cycle only occurs when the business activity and GDP returns to its previous peak.
The performance of any industry is dependent on interest rates. Consumers are more willing to borrow to satisfy their current needs when the interest rates are low. Businesses are also more willing to borrow in order to invest towards the growth of the company when interest rates are low. Increased interest rates results in decline in production rates and real GDP.
Over the years it can be noted that the peaks and troughs in the auto industry’s production rates occurs during the peak and troughs of the economy’s real GDP. In USA the auto industry contributes about three percent of the economy’s GDP however the influence it makes towards economic change is about forty percent. This shows that durable goods are affected by and also affect the economic activity of a country.
Other factors affecting the auto industry are the unemployment rates and inflation rates. There is a direct relationship between unemployment and inflation. Higher rates of unemployment correlate with lower rates of inflation. Increased unemployment reduces the ability to buy especially non essential goods like automobiles. Unemployment imposes many costs to society (Shedlock, 2010). When the auto sales are positive the employment rates in the industry also increase, the vice versa is also true. Technological advances have also reduced the amount of people the industry can employ at any given time.
Current Macroeconomic situation
During the economic downturn businesses had to reduce inventories and slash pay rolls as a result of severe liquidity crisis and deleveraging of the financial markets. The reduction in spending and reduced demand for goods and services was accelerated by frozen credit markets. This resulted to further layoffs and further increase in recession. Today, the economic situation in United States of America is improving. The GDP is rising and the economic data shows a positive trend. There has been a noticeable and sustainable improvement in the labor market. From the second half of 2013, Real GDP growth has been increasing to a more three percent annual rate.
The unemployment rate has reduced, with on average180, 000 new jobs a month being created over the past six months. Indicators of the improving labor market are that workers’ perception of job availability has improved and the increased willingness of workers to quit the current job. The Auto Industry auto manufactures and parts manufactures now employs 826,000 workers, in the past four years more than 173,000 jobs according to U.S federal jobs report 2013. Although these figures are still below the 1.1million workers employed in the industry before the recession it is still a vital positive change.
The accommodative monetary and fiscal policies are the two most important factors that have led to the improved economy. In the past few years when the economy was dragging the fiscal policy at the time was the cause. The fiscal policy was compounded by uncertainty, making people less willing and more cautious to make new commitments. People stopped spending on other things but necessities. This situation was further compounded by the increase in tax. The increased uncertainty caused by the fiscal policy resulted in an increase in unemployment rate by 1.25 percent translating to two million lost jobs as at late 2012 according to economists at Federal Reserve Bank of San Francisco (Leduc and Zheng, 2013). In December 2013 the Federal Reserve laid out a clear monetary policy that led to increased consumer confidence and reduced uncertainty.
The U.S economy is still operating below capacity since the GDP is still low and the unemployment rate still high relative to its potential. The global economic situation has made the US dollar to appreciate and the import prices to be low (Gordon, 2013). The economic struggle of other countries characterized by downward pressure on inflation is holding down the import price inflation in the United States. Even though there was economic improved in the United States in 2013 the import prices fell by over one percent. There is hope however that the foreign markets will strengthen and the downward pressure from import prices will reduce. If this happens then the inflation will come up to the targeted two percent over the next few years.
The monetary policy needs to remain accommodative since there is still high unemployment and low inflation. The federal funds rate is the primary conventional policy too which serves as a benchmark for short term market interest rates. Since December 2008 the fund rates have been lowered to near zero as the recession and financial crisis intensified. The government started providing forward guidance about the future trajectory fed funds rate in order to ensure lowered fund rates translated into longer term interest rates (Potter, 2013). Since late 2008 there has been a large scale asset purchase program. The latest round of this started in September 2012, where there was a eighty five billion purchase of combined long term Treasury and Mortgage backed securities each month at its peak. In December 2012 FOMC meeting, they outlined their plans to keep funds rate at zero lower bound. These plans are until the unemployment rate reduces to 6.5 percent (Board of Governors of the Federal Reserve System, 2013)
Post Recession Demographics
The recession period reshaped the automobile industry over the past few years. The auto industry is faced with a new post recession mindset of consumers, demographic ships and how auto manufacturers respond to these changes. What the consumers are expecting from the manufacturers may have changed. The recession, according to Jim Farley the Executive Vice President of Global Marketing, Sales and Services of Ford at the 2013 New York International Auto Show, has changed how consumers make purchase decisions and hat they look for in motor vehicles.
Luxury vehicles for example are no longer being defined by exclusivity, size and price rather people are associating luxury with performance, quality and features. In a survey for example sixty percent of the respondents expected a luxury car to cost about sixty thousand far less than the former expected one hundred luxury vehicle price tag. There is also a significant shift in the market with women, Hispanics and Millennials transforming the market. The most powerful trend is the global increasing consumer power of women. Women are trading agricultural work with businesses and professions drawing women into cities all over the world. In United States women are outpacing men. The Hispanic households’ net worth has increased over the years, Hispanics have a known reputation of buying luxury vehicles at a faster rate than the overall market.
The greatest demogr...