A:

The most important economic indicators for investing in the automotive sector are auto sales, the unemployment rate, consumer confidence and interest rates.

Auto sales are the most important indicator for the automotive sector. More auto sales lead to increased sales and earnings for automakers, which then order more parts from auto part makers. For much of the 20th century, auto sales steadily trended higher.

In the United States since 1985, auto sales have plateaued. Globally, they continue to trend higher, although the rate of growth is slowing. Growing markets are easier for companies to make profits.

The automotive sector is a cyclical business, and opportunities for organic growth are limited. Growth comes through winning customers from competitors on price or quality. This creates competition, as competitors are doing the same, and it leads to lower profits per car. Over the long term, margins in the auto industry move lower due to these factors, as with most competitive industries.

Since it is a cyclical business, changes in the revenues and earnings of automotive companies are more likely due to the state of the economy and the strength of the consumer. Sales in the automotive sector are higher when economic activity is strong and people feel confident about their future economic prospects. In this environment, more people are likely to make a major purchase, such as an automobile.

Companies in the auto sector tend to have hefty debt loads. Competition is fierce, and any stumble in terms of quality or products can be crippling in a competitive atmosphere. It is not unusual for a major automaker to go bankrupt, as General Motors did in 2008. However, this outcome is less likely when economic indicators are supportive of a positive economic environment.

Clearly, unemployment is a major factor in this environment. People do not feel optimistic about their prospects when they are unemployed. Additionally, people without jobs are less likely to have the means to afford a car. Someone with a job is not likely to make a major purchase if he is worried about losing his job.

In 2009, the unemployment rate was between 8% and 10%, and auto sales were 9 million on an annualized basis. In March 2015, the unemployment rate was 5.5% and auto sales were 16 million.

Consumer confidence shows how optimistic people are feeling about the economy. There are three components to consumer confidence surveys: consumer sentiment (how people personally feel at the moment), current economic conditions (how they feel the economy is doing currently) and consumer expectations (how they think it will be in six months).

Auto sales are dependent on all three of these conditions. Unemployment and consumer confidence are assessments of the economic environment. Interest rates affect the financing costs of purchasing a car; lower interest rates make the car cheaper. It is not enough to defy a poor economic environment, but it may make a difference for a few people who are sitting on the fence.

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