What Is the General Motors Indicator?
The term General Motors Indicator refers to an economic indicator that directly links the success and the failure of the company 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 responds similarly.
Conversely, if the company experiences a slump, the economy and stock market fall as well. The theory relies on the assumption that consumer confidence leads people to buy a new vehicle.
- The General Motors Indicator directly links the success and failure of the company to the performance of the U.S. economy and stock market.
- 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.
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, the High Heel Indicator, and the General Motors 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, the economy will continue to flourish, as will the stock market.
The G.M. Indicator relies on consumer confidence, which tends to increase when people have more disposable income.
There's also another idea behind the G.M. Indicator. This one 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.
But why is this so important? The automotive industry has been one of the most important in the U.S. economy because of its contribution to the country's GDP and the number of jobs it creates. General Motors is among the Big Three automakers in the country, including Ford and Fiat Chrysler. Collectively, these companies dominated the American and global auto markets.
There is still speculation about how direct the correlation is between auto sales and the overall economic standing of individuals. But this theory 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 declined because of increased competition and overall economic conditions.
G.M. sales dropped during the financial crisis because the demand for their less fuel-efficient vehicles also saw a decline. This was coupled with the decrease in available funds for financing due to credit restrictions. The company's stock price dropped over 70%compared with a general market decline of around 30%. Although a correlation does exist, the overall market and economy rely less on the performance of one automaker than it did in the 1970s.