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.

RELATED FAQS
  1. What are the main factors that drive share prices in the automotive sector?

    Find out the various factors that drive share prices in the automotive sector; automakers are cyclical stocks so economic ... Read Answer >>
  2. Why should an investor add exposure to the automotive sector to his or her portfolio?

    Learn more about what automotive manufacturers offer investors. Explore possible investments in automakers, auto parts manufacturers ... Read Answer >>
  3. Why is the automotive sector a good choice for value investing?

    Discover the reasons that make the automotive sector a good choice for value investing. The automotive sector is highly leveraged ... Read Answer >>
  4. What impact will growth in the emerging markets have on automotive sector?

    Learn about the automotive industry in emerging market nations and the prospects for growth in the auto industry in these ... Read Answer >>
  5. When during the economic cycle should I invest in the automotive sector?

    Discover the best time to invest in the automotive sector when the economy is in a recession and interest rates have already ... Read Answer >>
  6. What metrics can be used to evaluate companies in the automotive sector?

    Learn about some of the primary equity evaluation metrics used by investors and analysts to evaluate companies in the automotive ... Read Answer >>
Related Articles
  1. Personal Finance

    Americans Are Borrowing More To Buy Cars - But Should They Be?

    As the economy slowly heals, credit has become easier to obtain and interest rates have gone down. But does that mean it's wise to take on a car loan right now?
  2. Managing Wealth

    Analyzing Auto Stocks

    Find out what to consider before taking a ride with stocks from this industry.
  3. Personal Finance

    Auto Loans the Next Subprime: Jamie Dimon (JPM)

    JP Morgan Chase CEO Jamie Dimon issues a prescient warning over stress in the auto loan market to investors in New York.
  4. Personal Finance

    How The U.S. Automobile Industry Has Changed

    We give a brief history lesson on the rise and fall of the American auto industry.
  5. Investing

    Chinese Auto Stocks: Hot or Not? (F, TM)

    The Chinese auto market offers a lot of potential, but is it worth placing a bet now?
  6. Personal Finance

    AutoNation Numbers Confirm U.S. Auto Sales Slump

    AutonNation has provided the latest evidence that demand for cars and trucks in the U.S. is slowing.
  7. Insights

    Why Consumer Confidence Matters

    As consumer spending is a dominant component of the U.S. economy, how consumers feel about the economy can become self-fulfilling.
  8. Investing

    Automaker Stocks: Are These 2016's Best?

    Auto sales have been on fire, but auto stocks have not. What is 2016 likely to hold?
  9. Trading

    4 Key Indicators That Move The Markets

    Find out what economic and market indicators to watch to anticipate and react to market movements.
  10. Personal Finance

    Understanding the Unemployment Rate

    The unemployment rate is the percentage of people in the labor force who are unemployed but seeking a job.
RELATED TERMS
  1. Auto Insurance

    A policy purchased by vehicle owners to mitigate costs associated ...
  2. Special Finance

    A sector of the auto lending industry for borrowers with a limited ...
  3. Economic Indicator

    An economic indicator is a piece of economic data, usually of ...
  4. Cyclical Unemployment

    A factor of overall unemployment that relates to the cyclical ...
  5. Natural Unemployment

    The lowest rate of unemployment that an economy can sustain over ...
  6. Auto Sales

    The major producers of domestic automobiles report sales monthly. ...
Hot Definitions
  1. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  2. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  3. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  4. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  5. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  6. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
Trading Center