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The most important economic indicator for investors in the automotive sector is, not surprisingly, auto sales, but the unemployment rate and consumer confidence are important to watch as well.
One more number to keep an eye on is the current interest rate. It’s not technically an economic indicator, but the direction of loan rates has a big impact on auto sales for better or worse.
Here’s what to look for, and where to find it.
- The automakers release their latest sales numbers on the first day of the month.
- The Consumer Confidence Survey shows how willing Americans are to spend money soon.
- The monthly unemployment number points to good times or trouble for the auto sector.
- Interest rate changes have a strong impact on the auto sector, for better or worse.
Auto Sales
All of the U.S. automakers report their sales numbers on the first day of every month for the previous month. The St. Louis Federal Reserve tracks the overall numbers from month to month on its website.
The latest auto sales numbers are the most important indicator for the sector. It’s a lagging indicator, as is any number that reflects the past rather than pointing to the future.
Nevertheless, more auto sales lead to increased earnings for automakers. They use some of those earnings to step up production and order more parts from auto-parts makers.
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 and leads to lower profits per car. Over the long term, margins in the auto industry move lower due to these factors, as in most competitive industries.
As a cyclical business, the revenues and earnings of automotive companies are highly dependent on the state of the economy and the strength of the consumer sector. Vehicles are big-ticket items, and their sales are higher when economic activity is strong and people feel confident about their personal economic prospects.
The auto industry is considered a cyclical business, as are restaurants, hotels, airlines, furniture, and high-end retail. All are sensitive to the economy’s upswings and downswings.
Unemployment
The monthly unemployment numbers are released by the U.S. Bureau of Labor Statistics at 8:30 AM ET on the first Friday of each month for the previous month. The numbers are widely reported in the financial media immediately after their release and can be found on the agency’s website.
The bureau produces a vast array of statistics on employment in the U.S., but the one to watch is known as “total nonfarm payroll employment.” It reports the increase or decrease in the number of people newly employed and the corresponding increase or decrease in the overall unemployment rate.
Clearly, unemployment is a major factor for the auto sector. Even people who have jobs begin to worry that their luck won’t last. They are wary of making big financial decisions, such as signing for a loan that now takes on average almost six years to pay off.
Consumer Confidence
The Consumer Confidence Survey is released monthly by the Conference Board, a nonprofit business research group. The survey focuses on consumers’ current attitudes, buying intentions, vacation plans, and expectations for the economy. It is usually released on the last Tuesday of each month.
As the title implies, the Consumer Confidence survey shows how optimistic people are about their own financial affairs and about the economy at large. There are three components: consumer sentiment (how people regard their personal financial situations at the moment), current economic conditions (how they think the economy is doing), and consumer expectations (where they think the economy will be in six months).
Their answers are seen as suggesting whether consumers, in general, are likely to tighten their belts or go on a spending spree.
As always, the context is important. Whether the number is higher or lower than the number released in the previous month is seen as significant.
Interest Rates
Low Interest rates mean more affordable cars. Really low interest rates, such as the zero interest offered by some automakers when money is cheap, can be a dealmaker.
There are many sources for current interest rates, but the number that hits the news as soon as it is released is the monetary policy decision made by the Federal Open Market Committee about seven times a year.
In news shorthand, this is the Federal Reserve announcement on the prime lending rate. That decision ripples through the entire system, changing the rates that financial institutions charge their consumer and business customers.