What Is the General Motors Indicator?
The term General Motors indicator refers to an economic indicator that directly links the success and failure of GM to the performance of the U.S. economy and stock market. The theory suggests that when General Motors does well, the American economy and overall stock market will respond similarly.
Those who subscribe to the GM indicator theory also believe that if the company experiences a slump, the economy and stock market will also fall. The theory relies on the assumption that consumer confidence in the economy and market leads people to buy a new vehicle.
- The General Motors Indicator directly links the success and failure of GM to the performance of the U.S. economy and the stock market as a whole.
- The indicator suggests that when consumer confidence is high, people are more likely to make big purchases like new cars, leading to a flourishing economy and stock market.
- Another use for the indicator lies in the company's share price; when it rises, the economy flourishes while a drop indicates economic instability.
- Many commentators believe that the GM indicator carried much more weight in the 1970s and 80s when GM had a much broader control of the auto industry's market share.
How the General Motors Indicator Works
Economic indicators are used by economists, governments, and investors to interpret economic data in order to judge the health of a nation's economy. This, in turn, can help them shape their analysis and investment decisions. Some of the key indicators that we use include gross domestic product (GDP), the Consumer Price Index (CPI), and the monthly jobs report.
Indicators don't always have to be so formal. In fact, there are many economic indicators that can provide a unique view of the state of the economy—some seem stranger than others. Among them are the Olympics Indicator, the Buttered Popcorn Indicator, and the High Heel Indicator.
Like other unusual indicators, the General Motors Indicator relies heavily on income levels and consumer confidence. It suggests that when consumer confidence is high—generally when people have enough disposable income—individuals are more likely to make big purchases like new cars. When that happens, says the GM indicator, the economy and the stock market will flourish.
The second element behind the GM Indicator is rooted in the company's stock price. It theorizes that economic stability can be predicted by how G.M. share prices move. If they move up, the market can expect to see some economic stability. Conversely, when the stock price drops, this volatility may lead to increased economic woes or even an impending recession for the United States.
History of the General Motors Indicator
The automotive industry has been one of the most important sectors of the U.S. economy because of its contribution to the country's GDP and the number of jobs it creates. General Motors, in addition to Ford and Fiat Chrysler, is among the Big Three automakers in the country. While the collective market share of the auto industry held by these three companies used to be much higher in the 20th century, the "Big Three" still control about half of all automobile sales in the United States.
There is still much speculation about how direct the correlation is between auto sales and the overall economy. Some commentators claim the GM indicator had more weight in the 1970s and 1980s when General Motors was, by far, the largest carmaker in North America. Since then, the company's importance to the U.S. economy has declined because of an increase in competition and overall economic conditions.
Furthermore, the rise of rideshare services, as well as concerns about the environment, have made auto sales a less reliable gauge of the economy's health.
In addition to the increase in competition from domestic and foreign car manufacturers, General Motors was one of the companies most deeply impacted by the financial crisis. On June 1, 2009, the company declared bankruptcy and accepted a bailout from the federal government.
On Nov. 16, 2010, one year after filing for bankruptcy, GM raised an estimated $20.1 billion in its IPO, making it one of the largest IPOs ever.
While GM still makes up an important part of the U.S. economy, it's clear the overall market and economy rely less on the performance of one automaker than it did in the 1970s.