Impact of GAP on the automotive industry. The Federal Reserves primary goal is sustained growth of the economy with full employment and stable prices. Real GAP 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. 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.
The light-weight vehicle sector is made up of the total unit sales and leases of mommies and imported new automobiles and light-weight trucks (up to 10,000 pounds gross vehicle weight). This includes sales and leases to both consumers and businesses. More than 3. 7% of America’s total gross domestic product is generated by the sale and production of new light vehicles. As the chart below illustrates, a significant rise in sales in the light-weight vehicle sector is upon us: Table 1 Unemployment In order to measure the importance of unemployment, the United States uses what is referred to as the unemployment rate.
As defined on the William King website (n. . ), 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. Midwest: 5. 5 south:4. 9 west: 5. 2 Table 2 The unemployment rate has an affect on the car industry, especially in purchases dad.
Madding (2205) comments that “According to Greenshank, 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 June round of sales incentives, helping to push overall retail sales for the month up by a booming 1 . 7%. Madding 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 GAP 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. Table 5 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 allowing 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. Table 6 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. Table 7 Conclusion. It is easy to see that many factors contribute to the bottom line to the automotive industry; from the impact of GAP, the unemployment rate, personal income, interest rates, domestic vs.. Foreign sales, and inflation.
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